To Opt Out or Not Opt Out: That is the Question

When is it appropriate to make a quiet disclosure vs. making a disclosure through the Offshore Voluntary Disclosure Program?  This question is not necessarily easy to answer.

IRS agents handling OVDI/OVDP cases do not have discretion regarding offshore-related information return penalty imposition and therefore many people may opt for quiet disclosure. In a quiet disclosure the taxpayer will not participate in the OVDI/OVDP program because he or she does not want to guarantee penalty imposition. Instead, the taxpayer will just file their delinquent FBARs and amended (or original) U.S. tax returns showing the income regarding the offshore accounts, and let the IRS decide whether to impose the statutory FBAR penalties. As per the IRS FAQs website, “Taxpayers who have already made “quiet” disclosures are eligible to take advantage of the penalty framework applicable to the OVDP program by submitting an application, along with copies of their previously filed returns (original and amended) to the IRS’s Voluntary Disclosure Coordinator.”

By making a “quiet” disclosure, a taxpayer is at risk for being examined and potentially criminally prosecuted for all applicable years.  The possibility of criminal prosecution may be likely if, following to the “quiet” disclosure, the taxpayer does not fully disclose all foreign financial interests and associated taxes.  For example, refer to the case of Boston venture capitalist Michael Schiavo.  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.

The OVDP provides certainty to taxpayers that they will not be criminally prosecuted and also certainty to a fine structure.   Quiet disclosures however provide no such guarantees, but sometimes still may make sense.

To reiterate: a significant difference between the 2011 OVDI/OVDP and a “quiet” disclosure is that while FBAR and offshore-related information return penalties are mandatory under the 2011 OVDI/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 2011 OVDI/OVDP, but may instead assess penalties for a lower amount, if at all.  As you can see, although the penalties imposed on participants of the 2011 OVDI/OVDP may be reasonably estimated, the same cannot be said for taxpayers making “quiet” disclosures.  As with the quiet disclosure, one may be subject to criminal prosecution whereas there is absolute assurance this will not occur under the ODVI program.

A taxpayer faced with the decision between making a “noisy” or “quiet” disclosure should consult a tax professional to review all facts and circumstances.  There is simply no “one size fits all” approach.

Our law firm expects unabated aggressive enforcement of the US tax laws, including increased criminal prosecutions and civil audit examinations. We have been advising our clients to expect the unexpected (and the worst) in their tax treatment and disclosure of offshore assets.

Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.