I have recently received panic phone calls from accountants and clients of accountants about the alleged death of the historic quiet disclosures for qualifying for the IRS voluntary disclosure practice. I have tracked the immediate panic down to a recent discussion article in the TSCPA Viewpoint. The article is titled "Quiet Disclosures Out, Voluntary Disclosures Back In." (See article here.) The article was inspired by comments made by the Chief of IRS CI in a panel discussion at the 2009 May Meeting of the ABA Tax Section. The article reports, as the title states,
The world has now turned upside down again. At a meeting of the ABA Tax Section in Washington, D.C. in May, the Chief for the Criminal Investigation Division announced that “quiet disclosures” would no longer be accepted.I have discussed on this blog the comments actually made at the ABA Tax Section meeting and don't think they sound a death knell for quiet disclosures. My prior blog, titled Noise About Noisy and Quiet Voluntary Disclosures (5/10/09), may be viewed here. In view of the current panic, I shall make just a few other comments:
1. The disclosure under the new foreign bank account voluntary disclosure initiative requires a noisy disclosure following the procedures established for that initiative. (See the IRS wed page here.) If a taxpayer wants the criminal no-prosecution assurance in writing and the substantial civil tax penalty benefits (as compared to a worst case) that noisy disclosure procedure is required.
2. Quiet disclosures are alive and well in tax practice. Although, at the ABA meeting, the Chief of IRS CI appeared to have said earlier in the panel discussion that quiet disclosures were not acceptable, the panel clarified precisely what she meant. The quiet disclosure still may be effective for avoiding a criminal prosecution (both within the scope of the initiative and in other cases). The only difference between the quiet and the noisy disclosure (whether within the scope of the initiative or not) is that the noisy disclosure results in the IRS's written acknowledgment that there will be no recommendation for a criminal prosecution. In addition, the noisy disclosure within the scope of the current foreign account initiative assures the taxpayer is subject to significantly reduced potential civil penalties than could apply in a worst case. The quiet disclosure, if otherwise within the scope of the voluntary disclosure practice and properly implemented in the right case, (i) offers reasonable assurance -- but no written acknowledgment -- of no criminal prosecution but (ii) offers no assurance of civil penalty mitigation (so that, in particular, with respect to fact situations within the scope of the current initiative, the draconian FBAR and other penalties could apply full bore if the IRS chose to assert them against a taxpayer making a quiet disclosure).
3. Bottom line, quiet disclosure is still viable, but as I noted in my earlier blog, practitioners might want to be a bit more forthcoming in the disclosures made in the quiet filing of the delinquent or amended returns, particularly, I think, in the disclosures with amended returns correcting original fraudulent returns. This requires careful threading of the needle not to create as many or more problems than it solves. Taxpayers and practitioners who are risk averse should strongly consider doing a noisy disclosure.
4. As to the current initiative in particular, I think there are some cases where the taxpayer and the advisor should at least consider a quiet disclosure as a viable option. Assume these facts: The taxpayer has a foreign bank account of a static $1,000,000 from 2005 - 2007 and has evaded tax of $14,000 in each of the years. (Assume the taxpayer withdrew the earnings each year for personal consumption, so that the account amount is static over those years.) This taxpayer is subject to income tax liability of $14,000 per year ($42,000 for the 3 year period) and interest. The penalties that might apply are the 20% accuracy related penalty ($2,800 per year or $8,400 for 3 years) or the 75% civil fraud penalty ($11,200 per year or $33,600 for 3 years). The FBAR penalty, if reasonable cause cannot be shown, would be either (i) up to $10,000 per year ($30,000 total) or (ii) if willful, up to the greater of $100,000 or 50% of highest amount in the account per year ($500,000 per year or $1,500,000 for 3 years)). Let's say that the facts are such that the practitioner can offer reasonable assurance -- no guarantee -- that fraud is not involved so that the taxpayer will at worst be subject to the 20% accuracy related penalty on the tax underpayment and the $10,000 per year FBAR penalty. The potential cost to this taxpayer for the accuracy related penalty is, at worst, the same as being offered in the current noisy voluntary disclosure initiative ($8,400 for 3 years). At best, there would be no accuracy related penalty under the qualified amended return rules if fraud is not involved as I assume in this example.) And, the maximum exposure for the FBAR civil penalty is only $30,000, which is substantially less than the $200,000 FBAR penalty under the current initiative.
5. It is true in considering this example that the IRS FAQs say that a taxpayer could join the noisy voluntary disclosure initiative now and opt out in hopes of getting the better deal. At least in theory, by doing that the taxpayer will solve the criminal problem (although there is no express statement to that effect) and would be able to assert that the indicated significantly lesser civil penalties, if any, apply. I can still see some marginal opportunity in going the quiet disclosure route in the right case (and I emphasize the importance of doing it in the right case which requires development of factual nuances beyond this blog discussion). Let me caution, though, that this exercise is not for the faint of heart -- either the practitioner or the taxpayer.
6. I understand that the nature of a blog is such that I have no way of limiting my discussions to experienced criminal and tax practitioners. If the reader is not a criminal or tax practitioner experienced in this area, the reader should seek professional advice before undertaking any course of conduct in this area.