Today's Tax Notes has the following article discussing comments at the American Law Institute tax controversy conference in Washington: Jaime Arora, IRS Auditors Taking Closer Look at 'Quiet' Disclosures of Offshore Accounts, 2013 TNT 202-4 (10/18/13). Key excerpts from article are:
Scott D. Michel of Caplin & Drysdale said that it has recently become clear that the IRS has figured out a way to detect these so-called non-program disclosures. In speaking with revenue agents, Michel said, it is clear that they are unhappy with the practice and intend to go after those taxpayers they discover have taken that approach.
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Speaking on his own behalf, Russell [previously with the IRS Large Business and International Division and now at Dixon Hughes Goodman LLP] said that all penalties would be considered in the case of a non-program disclosure. Also, IRS agents have much less discretion in terms of penalties than if the taxpayer had come in through the voluntary disclosure program, he said.
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Practitioners ought to caution clients if they are considering making a quiet disclosure of an offshore account instead of going into the voluntary disclosure program, Michel said. "I think the odds of being detected are significantly higher now than they were two to three years ago," he said.One question not addressed in the article is whether, even if a quiet disclosure does not avoid potential civil penalties, will it avoid or mitigate the criminal prosecution risk? Attorneys have worried about that for a long time. Traditionally, although there was no specific IRS guidance blessing quiet disclosure vis-a-vis criminal prosecution, most attorneys did feel that quiet disclosures avoided or mitigated the criminal risk. I am not aware of any case where the taxpayer was prosecuted after making a good quiet disclosure and thereafter cooperating in any resulting investigation. Of course, if the taxpayer files fraudulent or misleading or incomplete amended or delinquent returns or delinquent FBARs as the "quiet disclosure," the taxpayer has not really made a quiet disclosure and the criminal mitigation risk is forfeited.
But, IRS officials have noised sometimes that whatever benefit practitioners may have thought were available for quiet disclosures historically are not available in the offshore account arena. Still, I wonder whether, in the offshore account arena, a good, squeaky clean quiet disclosure and full cooperation in an ensuing audit (if it occurs) would be prosecuted. For many of those taxpayers, the alternative may be not to clean up the past and perhaps stay under the radar screen in the future. So even a quiet disclosure with future compliance is still a win for the IRS even without criminally prosecuting the quiet disclosure taxpayer. Does the IRS really want to discourage even this process of amending the past and complying in the future by prosecution good quiet disclosures? Keep in mind, the IRS can assert significant civil penalty costs.
I do note Mr. Russell's comments above that suggest that, in terms of civil penalty costs, the quiet disclosure taxpayers may be treated less favorably than those joining the program and opting out. He has his finger to the pulse on this one, but I wonder why the IRS does not formally adopt better treatment for those who are audited by opt out rather than after quiet disclosures or go-forwards. This should encourage taxpayers to join the program.