Foreign Nationals & Expats
Houston Tax Attorney
Is a Quiet Disclosure Ever a Good Option in Non-Willful Cases?
What is a Quiet Disclosure?
In a non-willful failure to file FBARs and report foreign income, a quiet disclosure can refer to either (a) becoming compliant with only the current year and not correcting prior years, or (b) filing amended returns and paying any related tax and interest for previously unreported offshore income or assets without otherwise notifying the IRS through the OVDP or streamlined program. Under the later, you are filing FBARs and amended returns for the tax periods for which the FBAR and tax return statutes remain open.
What are the Risks Associated with Quiet Disclosures?
First, your previously uncorrected tax returns and FBARs can remain open for a number of years, and sometimes indefinitely.
The statute of limitations is extended to six years after a taxpayer’s return is filed if the taxpayer omits $5,000 from gross income attributable to a specified foreign financial asset, without regard to the reporting threshold or any reporting exceptions.
If the taxpayer fails to file or properly report an asset on Form 8938, the statute of limitations for the taxable year is extended until the taxpayer provides the required information. If the failure is due to reasonable cause, the statute of limitations is extended only with regard to the item or items related to such failure and not the entire tax year.
Source: IRS Explanation of Section 6038D Temporary and Proposed Regulations (link)
If your facts lend themselves to a strong reasonable cause statement, then all returns with open statutes should be submitted with reasonable cause statements per the Delinquent International Information Return Submission Procedures. You are submitting a reasonable cause statement, as part of your amended tax return, under penalties of perjury. You do not want to present incorrect facts in such a statement.
Otherwise, where a taxpayer submits a quiet disclosure in a non-willful case, the taxpayer is taking a gamble that in the event the IRS audits the return the result of the audit will be more favorable than an automatic assessment of a 5% Title 26 misc. offshore penalty assessment under the streamlined domestic offshore procedures. IRS examiner will consider the facts and circumstances of the particular case. Such factors will include the nature of the violation and the amounts involved.
What is the risk of non-willful penalties in an audit of a quiet disclosure? For non-willful FBAR penalties, that penalty could be $10,000 per year, per account. However, in most cases after 2015, IRS examiners are instructed to not assess non-willful penalties of more than $10,000 per year.
IRM 22.214.171.124.4.1 (11-06-2015)
Penalty for Nonwillful Violations – Calculation
- After May 12, 2015, in most cases, examiners will recommend one penalty per open year, regardless of the number of unreported foreign accounts. The penalty for each year is limited to $10,000. Examiners should still use the mitigation guidelines and their discretion in each case to determine whether a lesser penalty amount is appropriate.
- For multiple years with nonwillful violations, examiners may determine that asserting nonwillful penalties for each year is not warranted. In those cases, examiners, with the group manager’s approval after consultation with an Operating Division FBAR Coordinator, may assert a single penalty, not to exceed $10,000, for one year only.
- For other cases, the facts and circumstances (considering the conduct of the person required to file and the aggregate balance of the unreported foreign financial accounts) may indicate that asserting a separate nonwillful penalty for each unreported foreign financial account, and for each year, is warranted. In those cases, examiners, with the group manager’s approval after consultation with an Operating Division FBAR Coordinator, may assert a separate penalty for each account and for each year. The examiner’s workpapers must support such a penalty determination and document the group manager’s approval.
- In no event will the total amount of the penalties for nonwillful violations exceed 50 percent of the highest aggregate balance of all unreported foreign financial accounts for the years under examination.
Is a Quiet Disclosure an Option?
A qualified quiet disclosure involves a gamble – determining the risk of the IRS auditing the returns and determining the likelihood and amount of penalties being assessed. This risk of an audit for international non-compliance is unknown. We counsel taxpayers to either file under the streamlined procedures or draft a reasonable cause statement to file amended tax returns and FBARs. We have not come across any non-willful situations that fall outside these two methods of compliance.