The “Quiet” or “Silent” Disclosure

Our office consults with many clients in determining whether they need to enter into the 2012 IRS Offshore Voluntary Disclosure Program.  Because of the high 27.5% penalty in the 2012 OVDP program, many of our clients are considering alternative options for coming forward.  At present, one popular option is known as a “quiet” or “silent” disclosure.

The idea behind a quiet” or “silent” disclosure is that the taxpayer will just file her delinquent FBARs and amended (or original) U.S. tax returns reflecting the income associated with the offshore accounts, and hopefully avoid further IRS scrutiny (i.e., an audit whereby the IRS decides whether to impose the statutory penalties).

By making a “quiet” disclosure, a taxpayer runs the risk of being examined and potentially criminally prosecuted for all applicable years.  You provide the IRS the rope (the evidence is signed returns) to potentially hang you with. The risk of criminal prosecution may be likely if, pursuant to the “quiet” disclosure, the taxpayer fails to fully disclose all foreign financial interests and associated taxes.  For example, see the case of Michael Schiavo. Sometimes filing a false return is worse that filing no return at all. Some possible criminal charges include tax evasion and filing a false return.  Willfully failing to file an FBAR is also a violation subject to criminal penalties.

A major difference between the 2012 OVDP and a “quiet” disclosure is that while the programmatic 27.5% penalty is mandatory under the 2012 OVDP, these penalties are merely discretionary under a “quiet” disclosure.  An examiner reviewing a “quiet” disclosure has the ability to assess penalties in excess of those under 2012 OVDP, but may instead assess penalties for a lower amount, if at all. Although the penalties imposed on participants of the 2012 OVDP are definitively high, the same cannot be said for taxpayers making “quiet” disclosures.

There are risks of a “quiet” disclosure. The filing of an amended income tax return has heighted audit risk (probably significantly greater than the original filed return). The filing of a delinquent FBAR also has heighted audit risk (probably significantly greater than a timely filed FBAR).

Also there are other factors.

For no FBAR filing obligation, account(s) must have been under $10,000, in aggregate.  If a taxpayer files a first time FBAR with a larger balance, an examiner may ask now (since this account has blossomed, out of the blue, from nothing to a larger balance): where did this money come from?

An FBAR requests harmless basic account information: the bank, the account number, and the value of the account.  But beware.  For instance, let’s suppose that the IRS knows, through data collection (other taxpayer audits, other 2009/2011 OVDI submissions, bank subpoenas, etc.), that any HSBC (or any XYZ)  bank account that starts with “140″ (or known prefix)  was opened between 2001 and 2003.  This could initiate a civil audit or criminal investigation. The IRS civil division has the ability to assess FBAR penalties (probably willful penalties since the failing to fully and accurately file FBARs may deemed intentional).

In light of all of these factors, the analysis to enter the 2012 OVDP program versus other alternative options is complex and requires full legal analysis by a competent experienced tax attorney.

For additional information, contact Patel Law Offices at 732-623-9800. Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems.

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