Foreign Nationals & Expats
Houston Tax Attorney
Is a Qualified Quiet Disclosure Ever a Good Option?
What is a Qualified Quiet Disclosure?
In the world of offshore voluntary compliance, 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. The former is a procedure that is completely outside the offshore voluntary compliance options that are offered by the IRS and is a reckless option. The latter puts the client into compliance with the the tax laws of the United States as they apply to overseas assets, and will for purposes of this article be identified as a “qualified quiet disclosure.”
What are the Risks Associated with Quiet or Qualified Quiet Disclosures?
The risk with a quiet disclosure is obvious – 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)
The risks with a so-called qualified disclosure are not immediately obvious. This option should be discussed carefully with your attorney. If your facts lend themselves to a strong reasonable cause statement, then a better alternative might be to include a reasonable cause statement per the Delinquent International Information Return Submission Procedures. Qualified disclosures may make sense in situations where the facts are not so strong, but where the amount of additional taxes owed on the return are quite small (e.g., less than $500) and where the 5% Title 26 Miscellaneous Offshore Penalty might be thousands or tens of thousand of dollars. This is obviously not an equitable solution.
Pros and Cons of Making a Qualified Quiet Disclosure
First, anyone with sufficient exposure to criminal or civil willfulness penalties should enter into the Offshore Voluntary Disclosure Program. Either a qualified quiet disclosure or a streamlined compliance filing in such a case would be reckless.
When a client is considering qualified 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 could be subject to non-willful FBAR civil penalties that carry a penalty of up to $10,000 per year (unless there is reasonable cause). These are subject to mitigating factors which will reduce the potential maximum penalty. However, no non-willful FBAR penalties would be assessed if the taxpayer had entered into the streamlined domestic offshore procedures.
Where there are few additional taxes owed, the risk would be a very, very small chance of an audit of the amended tax returns submitted and potential FBAR penalties. And then within that small risk would be a small risk of penalties.
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 qualified 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. It could be an option in some situations where the 5% miscellaneous offshore penalty might be substantially higher than the non-willful civil penalties, where are very small amounts of taxes owed on the amended returns, and where there is no 8938 filing requirement. The statute on a tax return without an 8938 remains open until a correct 8938 is filed.