Thursday, June 16, 2011

Quiet Disclosures Being Moved into OVDI 2011 Process? (6/16/11)

There is some buzz in the community that persons making quiet disclosures are being moved into the OVDI 2011 process. While the information I have received to date is only sporadic and anecdotal, I thought it would be helpful to review the statute of quiet disclosures for foreign financial account tax and FBAR noncompliance.

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.

  1. 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.
  2. 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?
These reports and the uncertainties do raise the ante on the quiet disclosure gambit as an alternative to OVDI 2011.

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).


  1. Jack,

    In my view, QD (quiet disclosure) or ND (noisy diclosure like OVDI) should be treated the same. I totally agree with Jonf that the length of noncomliance should be taking into consideration for IRS to deal with QD. Just like penalty on 75K level, IRS should set up a rule to pick up QD and move them to ND.

    For temp workers, new immigrants, they should have three years grace period, QD should be fine..

    For others, move them into ND, and then should be treated the same as those who did ND.

  2. I would question: How effective is that for IRS? How are they going to handle the load? Are they going on a hiring spree here or what? They haven't even processed all of the 2009 OVDP cases & now they want to roll the QDs into OVDI. This just makes it more difficult for the IRS and the taxpayers.

    - Anon777

  3. I think doing a quiet disclosure is tantamount to driving the wrong way on a one way street. You may get lucky and not hit head on with a problem or you may get unlucky and get hurt badly. Ultimately if you choose OVDI or quiet disclosure the only recourse is to accept the goverment's results unless you want to pit your resources against those of the government. Remember though, they have the ability to create money out of thin air and they also pay the judges salaries(the government that is). The IRS has a pretty strong track record of getting what it wants. Proceed with extreme caution but clean it up before it gets even more costly. I think the IRS has publicly stated that those attempting quiets will not be afforded the benefits of OVDI. I would therefore expect flagged quiet disclosures to get at minimum a higher in lieu of penalty.


  4. Anon777,

    Remember HIRE ACT ? Obama needs boost employment rate to secure his 2nd term, maybe this is part of the gov plan. Hire a lot new graduates, and make a lot back and forth --- and get most money from all the cats (fat or thin), the cost will come from huge penalty in OVDI

  5. We know that quiet disclosures are being flagged for audit. To answer Jack's question about the IRS picking up quiet disclosures, it's not difficult. At a basic level: does the 1040X report foreign income? Yes. Did the original 1040 report foreign income? No. That's a quiet disclosure. Add in other indicators like lack of FBARs, lack of 3520s, etc.

    We also know that the Government is prosecuting taxpayers who filed quiet disclosures. See the Schaivo case.

    There are a lot of unknowns regarding the IRS moving quiet disclosures into the 2011 OVDI process. For one thing, will the taxpayer avoid prosecution? Perhaps administratively, OVDI processing will apply. And then, at the penalty phase, surprise! It's not a 25% penalty! It's 50%, which is what the plea agreements are getting.

    Quiet disclosure taxpayers really can't breath easy just because they may be processed as OVDI participants, because, after all, they're not.

  6. Unfortunately its hard to get a good read on the prosecution of Schaivo because the amended returns were not accurate or complete. He tried to understate income on even the amended returns. Did IRS go after him criminally because of this or was it the fact that he attempted a quiet disclosure? Supposedly there were a lot of quiet disclosures done. If so where are all the other prosecutions? If they are being hit with just the high penalties, we will never know unless someone with firsthand knowledge talks about it. I think doing a quiet disclosure is too risky.

  7. Isn't it unconstitutional to penalize taxpayers doing quiet disclosure when it just portrays their honesty of reporting past due taxes? If a taxpayer wanted to cheat, then there wouldn't have been a quiet disclosure. I can understand if the IRS goes behind real tax evaders, who are trying to avoid the high penalties by doing a quiet disclosure & any layman can tell that from the type of QD (e.g. taxpayer that has evaded taxes on millions of dollars). But what about a first timer, who has small amount of interest income. IRS has left no option for that first timer.

  8. This may sound harsh. IRS has repeatedly warned taxpayers not to do quiet disclosures. They even went as far as giving guidance to those who early on did quiet disclosures as to how to make it right by joining the initiative of the day. They even stated that amended returns would be scrutinized for offshore issues. Most importantly they clearly indicated that the initiative benefits would be forgone in the event a quiet offshore disclosure was uncovered. My attorney discussed this alternative in detail with me but advised against it in 2009. If it worked it would have saved considerable legal fees and huge penalties. Ultimately it was my decision but the blinders were totally removed by my attorney's detailed advise. I chose the 2009 OVDP without hesitation. If you stick a pencil in the eye of the beast, the beast may bite you back. Those that made the decision to ignore the guidance made a consious decision to try to shortcut the program to save money in fees and penalties. Now they face uncertainty as to more fees, penalties and maybe even prosecution. If there were in fact numerous quiet disclosures done over the last few years, they may be sitting ducks because IRS has time to uncover them. I just wonder if they are expending the resources to do so and how badly they will bite back in these cases.


  9. This is a great article really illustrating the problems with quiet disclosures.  (Love the Clint Eastwood, Dirty Harry analogy) Readers would be well served to contact this firm for assistance.  For another spin on quiet disclosure please see Quiet Disclosures of Offshore Foreign Accounts at


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