I assume that readers of this blog are very familiar with the two successive programs -- OVDP 2009 and OVDI 2011. Many taxpayers who wanted to get into compliance felt that the civil penalties offered under these programs were too harsh under their facts. As I and commenters discuss in Opting Out of the IRS 2009 OVDP and 2011 OVDI (6/14/11), taxpayers could get into the program, achieve its principal benefit of no prosecution, and opt out to try to present the equities of their situation as a basis for achieving lesser penalties than offered under the programs. The fear among practitioners and taxpayers is that the IRS will harshly treat the taxpayers opting out. Certainly, for administrative purposes, the IRS wants to create significant risks to opting out in order to encourage the critical mass of taxpayers to stay in the program where the processing costs per taxpayer are significantly less than will be obtained in processing the audits and post-audit processes (including appeals and litigation) of taxpayers opting out.
So why did not all noncompliant taxpayers get in and opt out and instead attempt to move into compliance via quiet disclosures? The reason has to be that they thought they might achieve a better result with quiet disclosures. If a quiet disclosure sails through the filing process (for amended returns and delinquent FBARs) without commotion from the IRS, the taxpayer wins. The taxpayer gets into compliance and is not penalized civilly or criminally for the tax reported and paid with the amended returns or the delinquent FBARs. But, the IRS claims that that it is going to be watching quiet disclosures and prevent taxpayers from achieving by stealth that which they could not obtain openly. Based on the sporadic and anecdotal evidence noted above, it appears that the IRS has in place a process to do what it claimed it would do.
Since this process is now just being implemented -- or at least evidence is just surfacing that it is being implemented -- there are some unknown questions that readers may offer comments upon, including their own experiences.
- How effective -- or complete --- is the IRS in picking up the quiet disclosures? I would think that, if the IRS is really serious about picking up quiet disclosures, it would be relatively easy to set up a database-centric program to pick them up (amended returns reporting income from foreign financial accounts and correcting Schedule B foreign account questions and delinquent FBARs). There may be some materiality standards so as to avoid the small stuff. But a complete program is doable.
- What is the effect of moving the quiet disclosure into the OVDI 2011 process? Will the taxpayers be treated the same as if they had initiated the OVDI 2011 process rather than trying to end-run it with a quiet disclosure? Or, is their movement into OVDI simply for processing purposes and they will be hit with higher penalties at the end?
Indeed, these reports and the uncertainties may well push taxpayers into yet other alternatives -- i.e., getting compliant on a go-forward basis only (with a further decision point as to whether to go forward now or 2012) or not getting compliant at all, perhaps with a strategy of closing down the foreign financial accounts and hoping that time will mitigate or eliminate all the risks they have taken. These strategies should take into account that risks of the U.S. obtaining access to information from other banks, Swiss and non-Swiss.
Finally, for those implementing the quiet disclosure process, particular care must be taken to insure that the amended returns and delinquent FBARs fairly report the information and additional taxes. See A Botched Foreign Account Quiet Disclosure Draws Criminal Charges (5/19/11).