Quiet Disclosure (otherwise known as “Silent Disclosure” or “Soft Disclosure”) of your foreign accounts and foreign income on an FBAR or late/amended tax return is a serious violation of U.S. Tax Law, which can subject you to very high fines, penalties and criminal investigation.
FBAR Quiet Disclosure
You’ve done the research (and then researched it again and again) and have come to the conclusion that you are out of IRS tax compliance because you never filed FBAR forms, disclosed your foreign accounts to the IRS or DOT, or reported your foreign passive income on your U.S. Tax Return.
FBAR – Foreign Accounts
While there are a number of different types of foreign accounts, some of the more common types of accounts, include:
- Foreign Bank Accounts
- Foreign Investment Accounts
- Foreign Retirement Account
- Foreign Life Insurance Policy
- Foreign Mutual Funds or ETF Investments
You have read numerous blogs and Expat Tax Forums written by individuals who probably have little to no experience in actually filing these forms and generally like to wax poetic to anyone that will listen. Having never been interrogated by the IRS themselves, they convince you that submitting these forms to the DOT and IRS is a waste of time, and that the chances of the IRS or Department of Treasury finding you in the sea of non-compliant taxpayers is relatively slim.
As a result, if you decide you are going to break the law (Yes, a quiet disclosure is Tax Evasion/Tax Fraud, which is a Tax Crime) pursue a quiet disclosure/silent disclosure and submit amended tax returns and prior year FBARs without going through either of the IRS Offshore Disclosure Programs (OVDP or IRS Streamlined Program).
While not everyone who submits a quiet disclosure/silent disclosure gets caught, for the ones who do it can be very costly endeavor — including loss of the money in the accounts and possibly your freedom depending on the facts and circumstances of your case.
The following is a case study of how a Quiet Disclosure or Silent Disclosure can go bad:
Case Study: Quiet Disclosure/Silent Disclosure
Scott is originally from Singapore but relocated to the United States nearly 10 years ago. Around eight (8) years ago he opened up foreign accounts in Singapore, Hong Kong and other generous tax countries which do not tax passive income.
Scott has a good job and continues to invest in foreign accounts. As a result, Scott has been able to amass a small fortune overseas. In fact, Scott is earning upwards of $10,000-$20,000 a year on his foreign investments in interest money. Moreover (and not coincidentally) in all of the countries that Scott maintains accounts, there is no passive income tax and therefore the money he receives overseas is not Tax Deducted at Source (TDS); thus, Scott receives the payments tax free.
Scott is aware that he is supposed to report his accounts on an annual FBAR statements and include the income on his US tax return but simply does not want to pay US tax on these monies. From his perspective, the money is earned overseas and therefore the US should not be entitled to tax.
Fast-forward to 2014 and the enforcement of FATCA (Foreign Account Tax Compliance Act). Scott receives a “FATCA Letter” from his foreign banks letting him know he needs to respond to the bank and confirm/certify that he has complied with all of his US tax filing and payment requirements. Scott does research and learns that he could qualify for OVDP (Offshore Voluntary Disclosure Program) but not the streamlined program because his actions were willful.
Scott also realizes that two of his banks are considered “bad banks” and therefore he would be subject to a 50% penalty on the foreign accounts. When the 50% penalty is coupled with past tax liability, Scott would owe nearly the full balance of the foreign accounts to the IRS.
Therefore, Scott makes the fateful decision to submit a quiet disclosure.
Scott amends three years of tax returns and submits three years of FBARs to the IRS and DOT without the protection of OVDP. Scott does not hear from the IRS for a while and believes everything is good until he’s leaving the health club and notices two individuals in suits standing by his vehicle. The two individuals introduce themselves as IRS special agents and ask Scott if they can speak with them.
Scott has seen enough movies to know he should never speak with “the Fuzz” without counsel. Scott refuses to speak to the IRS Special Agents and says he wants to obtain an attorney. Scott is not arrested on the spot but understands he could be facing significant fines and penalties in this matter is not handled properly.
How did the IRS Learn of Scott’s Foreign Accounts?
Since some of Scott’s money was in bad banks, when these bad banks reported the names of US taxpayer accounts to the IRS and DOT, Scott’s name popped up multiple times – since he had multiple accounts in multiple foreign financial institutions. When the IRS and DOJ cross-referenced Scott’s account information with his US tax return and learned not only had he not reported the account information but also did not include the earnings in his tax return (and registered for the accounts as a Singaporean citizen and not a U.S. citizen), he immiedately got the attention of the criminal investigation unit.
Speak with Experienced Counsel
These days, it seems that everybody thinks they do offshore disclosure because they handled a handful of cases or read our blog daily. Tax Law is a specialized area of law and Offshore Voluntary Disclosure (when done properly) is an especially complex area of Tax Law.
In the last few years, we have been repeatedly contacted by individuals letting us know that they were “sold” by inexperienced counsel. It is usually because inexperienced counsel does not know how to properly vet out the cases to extract the necessary information from the client, and then sells them on a much lower fee to go “streamlined” in cases it is not warranted (Willful, MTM elections, Opt-Out, etc.)
With that said, there are a group of attorneys, like ourselves, that focus exclusively in this area of law. Your OVDP or Streamlined Attorney should have:
- At least 15 years of experience as a practicing lawyer
- An advanced Master’s of Tax Law Degree (LL.M.); and
- Either a CPA or Enrolled Agent (EA) license.
Getting into IRS Offshore/Foreign Reporting Compliance
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.
When Do I Need to Use Voluntary Disclosure?
Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to Voluntary Disclosure.
We Can Help.