Foreign Nationals & Expats
Houston Tax Attorney
Is Quiet Disclosure Ever a Good Option?
What is a Quiet Disclosure?
In the world of offshore voluntary compliance, a quiet disclosure refers to filing amended returns and paying any related tax and interest for previously unreported offshore income or assets without otherwise notifying the IRS. This is a procedure that is completely outside the offshore voluntary compliance options that are offered by the IRS.
What are the Risks Associated with Quiet Disclosures?
First, anyone with exposure to criminal or civil willfulness penalties should enter into the Offshore Voluntary Disclosure Program. Either a quiet disclosure or a streamlined compliance filing in such a case would be reckless.
When a client is considering quiet disclosure, it’s usually as an alternative to the streamlined domestic offshore procedures (SDOP). If the taxpayer qualifies for the streamlined foreign offshore procedures (SFOP), there’s really no upside to making a quiet disclosure, as there are no penalties under SFOP.
Let’s compare the audit risk under quiet disclosure vs. streamlined domestic offshore procedures. Situation 1: taxpayer fails to file FBARs or to report foreign income for several years. Assume that his failure is non-willful. What would happen in the event of an audit? If it was a quiet disclosure, then the taxpayer would be subject to non-willful FBAR civil penalties that carry a penalty of up to $10,000 per year (unless there is reasonable cause). However, no non-willful FBAR penalties would be assessed if the taxpayer had entered into the streamlined domestic offshore procedures.
Situation 2: Same as the above but assume that during the audit the taxpayer’s non-compliance was found to be civilly willful. Regardless of whether the taxpayer makes a quiet disclosure or enters into the SDOP, there is no protection against civil penalties where there is willfulness. In such an event, the taxpayer would be assessed a civil penalty that is equivalent to the greater of $100,000 or 50% of the balance in an unreported foreign account, per year, for a maximum of 6 years. Such a taxpayer should’ve entered into the OVDP.
Is Quiet Disclosure an Option?
This is a decision that you should be making with your attorney. It involves a careful risk analysis based on the particular facts and circumstances of your case. I have never used quiet disclosure for a client, but theoretically it could be an option in some situations where the 5% miscellaneous offshore penalty might be substantially higher than the non-willful civil penalties.