Tax Blog/Blawg

As part of its current Offshore Voluntary Disclosure Initiative (“OVDI”), the IRS is strongly encouraging taxpayers against making so-called “quiet” disclosures, in which taxpayers file amended tax returns, pay the applicable taxes and interest, and hope that the IRS doesn’t identify them for further investigation.  These disclosures are described as quiet because they involve neither alerting the IRS to the amended returns nor offering to pay any applicable penalties.  Because taxpayers may rightfully perceive the 25-percent penalty required to participate in OVDI as a rather expensive pound of flesh, taxpayers holding undisclosed offshore accounts may conclude that making quiet disclosures, rather than entering OVDI, is a more palatable method to come into tax compliance.

In the Frequently Asked Questions regarding OVDI, however, the IRS warns taxpayers that it will not view quiet disclosures favorably when they are made in lieu of entering the program:

The IRS is reviewing amended returns and could select any amended return for examination. The IRS has identified, and will continue to identify, amended tax returns reporting increases in income. The IRS will closely review these returns to determine whether enforcement action is appropriate. If a return is selected for examination, the 25 percent offshore penalty would not be available. When criminal behavior is evident and the disclosure does not meet the requirements of a voluntary disclosure under IRM 9.5.11.9, the IRS may recommend criminal prosecution to the Department of Justice.

If taxpayers had any doubts about the IRS’s willingness to pursue criminal enforcement in the case of quiet disclosures, those doubts can be considered safely put to rest.  Last Thursday, the government charged an offshore account holder with failing to file a Foreign Bank Account Report (“FBAR”) disclosing his interest in an account at HSBC Bank Bermuda.  According to the information filed by the Department of Justice, the defendant also funneled income from a partnership arrangement into an undisclosed bank account at UBS in Switzerland.  During the IRS’s first offshore voluntary disclosure program in 2009, the defendant pursued a “quiet” disclosure, filing amended returns for prior tax years that included the interest earned on his undisclosed Bermuda account.

Before assuming that all quiet disclosures will result in criminal prosecution, it bears noting that the disclosure at issue here had several flaws.  For example, on his amended returns, the defendant continued to omit the income he earned from his partnership arrangement.  A taxpayer who wants to earn the credibility that is necessary to avoid criminal prosecution must make complete and truthful disclosures.  Indeed, filing of an amended return that intentionally continues to omit income constitutes a second crime.  Given that the defendant failed to report all of his undisclosed income on his amended returns, the disclosures could not be considered either complete or truthful.  If anything, such disclosures only increased the likelihood of criminal prosecution.

We can only speculate about whether the government would have pursued a criminal prosecution had the defendant’s quiet disclosure been complete.  Nevertheless, the prosecution is clearly intended to demonstrate the IRS’s desire that individuals make complete disclosures through the OVDI program, and accordingly pay all taxes, interest, and penalties that accompany that process.  For taxpayers who are contemplating quiet disclosure of their foreign bank accounts, this prosecution can be seen as a warning shot.

For more recent coverage, see After OVDI: What’s Next For Disclosures Of Foreign Bank Accounts?