Good Article on Pitfalls for Quiet Disclosure in the Offshore Setting (2/20/16)

Many readers of this blog will or should be interested in this article offered by  Frank Agostino and Lawrence A. Sannicandro of Agostino & Associates:  “Gotcha" -- Unanticipated Audit Issues After Quiet Disclosures (Agostino & Associates Monthly Journal of Tax Controversy (February 2016), here.  This firm has been very active in the offshore account area and thus can speak with authority and experience in this context.

I cut and paste from the Introduction and the Conclusion so that those interested will know whether to read the article.

I. Introduction 

Some taxpayers not willing to pay the 27.5% penalty that otherwise applied under the traditional Offshore Voluntary Disclosure Programs have made quiet disclosures or entered into the Streamlined Filing Compliance Procedures (“Streamlined Program”). Many of these taxpayers rejected the protections of the Offshore Voluntary Disclosure Programs in favor of what they perceived to be a more cost-effective quiet or streamlined disclosure. These taxpayers have subjected themselves to criminal liability and audit adjustments which, depending upon the source of the unreported income, could easily eclipse the 27.5% penalty under the traditional program. In this regard, audits of returns submitted as quiet disclosures or under the Streamlined Program have been (and should be) troubling to both practitioners and clients.  

This article discusses common audit adjustments that can apply to returns for taxpayers with international activities, including: the disallowance of deductions and credits for U.S. citizens, resident aliens, and nonresident aliens; the disallowance of the foreign earned income exclusion for U.S. citizens and resident aliens; and the Internal Revenue Service’s ability to recharacterize as ordinary income purported gifts and bequests from a partnership or a foreign corporation under Treas. Reg. § 1.672(f)-4. This article also highlights those taxpayers who are most likely to be negatively affected by each type of adjustment. Finally, for taxpayers who imprudently made a quiet disclosure, this article discusses how to transition the taxpayer from a quiet disclosure to a traditional Offshore Voluntary Disclosure Program.  

*** 

VIII. Conclusion

Practitioners worry about audits of returns submitted as quiet disclosures for good reason. The Service has been far less draconian in submissions under a traditional Offshore Voluntary Disclosure Program or the Streamlined Program, but revenue agents have taken a hard line in disallowing otherwise deductions and credits with respect to quiet disclosures. In this regard, the Service is granted broad authority to deny legitimate deductions, credits, and income exclusions, and to recast transactions to not only prevent the avoidance of U.S. tax but to impute income to U.S. donees and legatees. Practitioners should consider these issues when advising taxpayers to submit  returns as quiet disclosures, pursuant to the Streamlined Program, or under the traditional Offshore Voluntary Disclosure Program. Finally, it is important for practitioners to reevaluate whether the quiet disclosure was in fact a more cost-effective alternative than the traditional Offshore Voluntary Disclosure Program before being contacted by the Service. 

IRS on Quiet Filings for Offshore Account Delinquencies or Underreporting (11/9/14)

Tax Notes Today reports the following on quiet disclosures (Amy S. Elliott,  IRS Working With SSA on Offshore Streamlined Filing Requirement, 2014 TNT 216-3 (11/7/14), no link available):

Regarding so-called quiet disclosures -- when taxpayers file amended returns and delinquent foreign bank account reports without coming in through the offshore voluntary disclosure program or the streamlined program -- Best [senior adviser to the deputy commissioner (international), IRS Large Business and International Division] said, "The IRS recognizes that a quiet filing is a choice that the taxpayer has." 

But Best added, "We would prefer that taxpayers come in through one of our programs so that we have tracking mechanisms, information gathering mechanisms set up, but ultimately it's up to the taxpayer."

In the past, when I have heard IRS representatives pronounce on quiet disclosures they have been more discouraging than Ms. Best.  I and other practitioners, however, have viewed quiet disclosures as a real option.  Of course, the taxpayer will be required on the FBAR to explain the delinquency and should, if possible state the case for the IRS not to audit or assert an onerous penalty.  Still, it is good to hear an IRS representative reported to have present quiet disclosures as an option without, apparently, saying stronger words of discouragement.

Quiet disclosures are not for willful actors.  OVDI/P is for willful actors.  But, for nonwillful actors, particularly those with facts and circumstances toward the nonwillful end of the spectrum can generally (at least conceptually) get better results by OVDI/P with opt out, by Streamlined and by quiet disclosure with audit (should always assume an audit in testing whether quiet disclosure is a viable option).  In all three of those cases, the income tax is the tax plus interest with no accuracy related penalty for only open years and  the FBAR penalty will be the nonwillful penalty for the open years.  The key drill down, of course, is given the range of possible nonwillful FBAR penalties, a taxpayer may prefer the Streamlined with some certainty as to the offshore penalty (a surrogate for the FBAR penalty because the other potential penalties probably would not apply).

IRS Indian Initiative for Persons Outside OVDP; Also on Quiet Disclosures (11/14/13)

Reporting on a California State Bar Tax Section Meeting, Tax Notes reports that the IRS will soon (as early as the week of 11/11/13) ) "begin examining U.S. taxpayers suspected of holding undeclared accounts in Indian banks, according to Nicholas Connors, a supervisory revenue agent" with SB/SE.  Kristen A. Parillo, IRS Will Soon Examine U.S. Taxpayers With Undeclared Indian Bank Accounts, 2013 TNT 219-4 (11/13/13).  Some excerpts:

After receiving account information from Indian banks, the IRS has about 100 Indian bank account cases that it is sending out for examination across the country, he said. 

"I think California, because of the large Indian population, is going to get more than its fair share of cases," Connors said. "Within the Northern California/Bay Area, we're scheduled to pick up 30 or 40 of those." 

"Looking ahead, the offshore bank investigations are just going to grow," Connors said. In addition to India, "Israel is on the list of banks that is providing information to us, and from there it just keeps going on and on," he said. "Within Examination, there's talk that this could someday become a work issue for every single revenue agent in SB/SE where everyone will be working some type of offshore case."

Regarding Quiet Disclosures, Tax Notes reports:

The SEP team continues to examine quiet disclosures as well as cases regarding taxpayers who opted out of the IRS offshore voluntary disclosure program (OVDP), said Connors. "The guidance we're getting on quiet disclosures has been extremely harsh," he said. "Essentially those taxpayers walked past compliance three times: They didn't file correctly the first time, they didn't come in under voluntary disclosure, and now they're trying to hide it by slipping it in through an amended return. Don't expect much leniency if we have a quiet disclosure case; agents are being told to be aggressive." 

Again, I will repeat my mantra that the IRS has not said that the audit for persons who join OVDP and opt out will be more lenient than for persons who are audited after a quiet disclosure or a go-forward.  One could read the foregoing statement as hinting at that, but that is not been what the IRS has said to date.  All it has said is that those opting out of OVDP will be audited and get the audit result.  That is all that can happen to taxpayers who are audited after quiet disclosures or go-forwards.

Quiet Disclosures Increasingly on IRS's Radar Screen (10/18/13)

Some taxpayers not willing to pay the price of the various Offshore Voluntary Disclosure Initiatives (currently OVDP 2012) have attempted an end run the initiatives by doing "quiet disclosures" -- by filing some number of years of amended or delinquent returns and delinquent FBARs.  Apparently, they think that the IRS may process the returns and FBARs without further ado or, at worst, if they are caught, the quiet disclosure might mitigate either criminal or civil penalty risks.

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. 

* * * * 

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. 

* * * * 

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.

Quiet Disclosures That Don't Stay Quiet - Civil Examinations (6/13/13)

Chuck Rettig, a major player in representing taxpayers through the thicket of correcting offshore account noncompliance, has written a very good summary article of the quiet disclosure that is discovered and examined by the IRS.  Charles Rettig, IRS FBAR Voluntary Disclosure Program: Taxpayer Interviews (Forbes 6/12/13), here.

The problem, he notes, is that "Many taxpayers continue to enter the OVDP. Others have bypassed the OVDP and simply amended returns or begun filing accurate returns on a prospective basis."

After discussing, the GAO report (previously blogged here), Chuck says that for persons filing amended returns -- quiet disclosures -- in lieu of joining OVDP:: " It should be anticipated that the IRS will pursue examinations of these amended returns in some manner."

With respect to the interviews in those examinations, Chuck says

When discovered, U.S. taxpayers who have bypassed the OVDP by filing amended or delinquent returns and FBARs should anticipate detailed IRS examinations likely to include interviews of the taxpayer, their return preparer and pehaps others. Numerous taxpayers having previously undisclosed interests in foreign financial accounts have recently been interviewed by representatives of the IRS as well as many having been interviewed by prosecutors associated with the Tax Division of the Department of Justice.

He then describes the types of questions and inquiries made.  He concludes:

Taxpayers continuing to have undisclosed interests in foreign financial accounts must consult competent tax professionals before deciding to participate in the OVDP.  Some may decide to risk detection by the IRS and the imposition of substantial penalties, including the civil fraud penalty, numerous foreign information return penalties, and the potential risk of criminal prosecution. If discovered before any voluntary disclosure submission, the results can be devastating. 

I recommend Chuck's article to those contemplating or having made a quiet disclosure.

JAT comments:

Of course, the big uncertainty with the quiet disclosures for those taxpayers with material criminal investigation and prosecution risk is that, according to the IRS's rhetoric, quiet disclosures for offshore accounts are not "voluntary disclosures" subject to the voluntary disclosure program to mitigate or eliminate such risk.  The message -- or risk -- that the IRS intends to convey is, dammit, join the program or take the risk.

Despite the IRS's rhetoric, one has to ask the question whether a taxpayer otherwise have criminal investigation and prosecution risk can eliminate or mitigate the risk with a good quiet disclosure (whatever that is, but I know it when I see or do it)?  I think many practitioners think that the taxpayer can do that; that there are good reasons that the IRS and DOJ Tax would make the call at least not to criminally prosecute a good quiet disclosure.  Of course, I approach it a different way.  If the taxpayer has material criminal investigation and prosecution risk, joining the program is the way to go and the taxpayer should not be doing a quiet disclosure upon the uncertain hope that it will not be discovered and, if discovered, it will mitigate or eliminate the criminal investigation and prosecution risk.  Having said that, however, I suspect that, in the final analysis, for good quiet disclosures, the IRS will exercise discretion to conduct just a civil examination.  I suspect that the real risk is in the amount of the civil penalties that will be asserted and the number of income tax years that will be put in play.  And for those taxpayers will real criminal prosecution risk, there is a major risk of severe penalties and thus should join without quiet disclosure to get better penalties or, if the quiet disclosure was made and not yet discovered by the IRS, join the program.

GAO Report Targets Strategies Other than OVDP (4/26/13)

The U.S. Government Accountability Office (GAO) has released a report titled Offshore Tax Evasion:  IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion (GAO-13-318, Mar 27, 2013), here.  The summary is here.

The summary page is here.

What GAO Found 

As of December 2012, the Internal Revenue Service's (IRS) four offshore programs have resulted in more than 39,000 disclosures by taxpayers and over $5.5 billion in revenues. The offshore programs attract taxpayers by offering a reduced risk of criminal prosecution and lower penalties than if the unreported income was discovered by one of IRS's other enforcement programs. For the 2009 Offshore Voluntary Disclosure Program (OVDP), nearly all program participants received the standard offshore penalty--20 percent of the highest aggregate value of the accounts--meaning the account value was greater than $75,000 and taxpayers used the accounts (e.g., made deposits or withdrawals) during the period under review. The median account balance of the more than 10,000 cases closed so far from the 2009 OVDP was $570,000. Participant cases with offshore penalties greater than $1 million represented about 6 percent of all 2009 OVDP cases, but accounted for almost half of all offshore penalties. Taxpayers from these cases disclosed a variety of reasons for having offshore accounts, and more than half of them had accounts at Swiss bank UBS. 

Using 2009 OVDP data, IRS identified bank names and account locations that helped it pursue additional noncompliance. Based on a review of cases, GAO found examples of immigrants who stated in their 2009 OVDP applications that they were unaware of their offshore reporting requirements. IRS officials from the Offshore Compliance Initiative office said they have not targeted outreach efforts to new immigrants. Using information from the 2009 OVDP, such as the characteristics of taxpayers who were not aware of their reporting requirements, to increase education and outreach to those populations could promote voluntary compliance.

Moneyball on Go-Forwards - Show Me the Data (5/12/12)

I had a comment posted today here as follows:

Many Americans Abroad Surprised by Tax Code's Nasty Bite
http://nyti.ms/JFY6x9
From the above article
FBAR forms filed in 2009 276,386
filed in 2011 618,134

The commenter was referring to statistics in the following article: Brian Knowlton, Many Americans Abroad Surprised by Tax Code's Nasty Bite (NYT 5/10/12), here.

I will use a separate blog entry to respond to this data.  My response is in the form of a question to which I hope readers will respond, particularly readers with some experience with criminal tax practice.

I suspect that the bulk of the delta filers between 2009 and 2011 (app 340,000, including the first time filers in 2010) are had accounts prior 2010 who did not join OVDI or do a quiet disclosure.  Let's just say that 250,00 of them are first time filers in 2010 or 2011 who had accounts in prior years but did not join OVDI or make a quiet disclosure.  They are the go-forward data set.

How many do you think will be (a) investigated criminally for past years or (b) prosecuted for past years?

Keep in mind that DOJ Tax CES prosecutes at most, say, 3,000 tax cases (max) of all sorts every year.

And, a related question, how do you think the IRS will investigate civilly -- well audit, even if not civilly (sorry for the pun -- in enough detail to consider significant civil penalties?  Keep in mind in this regard that well-advised taxpayers doing a go-forward will have self-selected a data set in which the IRS will not be able to assert or sustain significant penalties in the bulk of the cases.  And, if the IRS perceives that, will it nevertheless divert major resources -- which are limited and will take away from other enforcement efforts -- to chase down relatively small penalties?  Finally, keep in mind that the FBAR penalties the IRS asserts after this major audit enforcement initiative would then have to be followed by more civil litigation enforcement than either DOJ Tax or the Courts likely have otherwise uncommitted resources to handle.

IRS Guidance on U.S. Persons with Foreign Assets and, Coincidentally, Quiet Disclosures on FBAR Delinquencies (12/9/11)

Yesterday, I posted on the News and Rumors page a new IRS web page (or newly revised web page) that provides a fair, succinct summary of obligations for foreign assets, including foreign financial accounts.  The web page is titled U.S. Citizens or Dual Citizens Residing Outside the U.S. (dated 12/7/11), here.  I think, at least on a go-forward basis, this page should be reviewed by all U.S. citizens and non-citizen U.S. persons with offshore assets.

In brief, the page covers (i) the income tax return filing obligations (including the new foreign asset Form 8938 for income tax returns beginning in 2012)  and (ii) the FBAR filing obligations.  The page also summarizes relief from penalties that might apply for income tax underreporting and underpayment and for failure to file FBARs.  It is a good summary.  It is particularly good at providing a fair sense of when the taxpayer may have reasonable cause for income tax and FBAR deficiencies.  This is not definitive advice as to when the reasonable cause exception may apply in a specific case, but for the relatively uninitiated, it is a good starting point.

The FBAR discussion is, in my judgment, incomplete.  It says that a U.S. citizen "may be required to report your interest in certain foreign financial accounts" on the FBAR.  U.S. citizens (and indeed non-U.S. citizens required to file an FBAR) should remember that it is not just a beneficial or title ownership interest that must be disclosed but also signatory and other authority over the account beneficially owned by another person.

Although the page is specifically addressed to U.S. citizens (dual or otherwise) living outside the U.S., the matters covered also apply to U.S. citizens living in the U.S. and non-citizen U.S. persons (e.g., U.S. resident aliens) who own foreign assets (including foreign financial accounts) or, as to the FBAR, have signatory or other authority over foreign financial accounts.

Now, to a point that might particularly interest readers of this blog,  The Fact Sheet does offer some fairly cryptic guidance as to what to do about the past.

Voluntary Disclosures of Foreign Financial Account and Related Matters After OVDI 2011 (9/20/11)

The IRS has posted contact information for persons desiring to make noisy voluntary disclosures. See Voluntary Disclosure Contacts in IRS Criminal Investigation, here. The notice states:

Tax professionals or individuals who want to make a voluntary disclosure not covered by the 2011 Offshore Voluntary Disclosure Initiative, may contact an IRS criminal investigator at the numbers below.

I speculate that

1. As in the two programs (OVDP 2009 and OVDI 2011) the IRS will discourage quiet disclosures of foreign financial institution accounts.  Will the IRS and DOJ Tax will pick off one or two or more where the quiet is not quite up to snuff and prosecute?  (I can't define the up to snuff standard; it is like pornography -- you will know it when you see it and good practitioners will prevent their clients from submitting not up to snuff quiet disclosures.)

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.

To OVDI or Not to OVDI - That is the Question (Of Quiet Disclosures and Doing Nothing) (5/23/11)

We have had a lot of discussion in the threads of other topics discussing some of the rough edges in the OVDI 2011 initiative (and its predecessor OVDP 2009 initiative).  The alternatives to participating are (i) quiet disclosure for some number of years or (ii) do nothing.  In either event, the U.S. account owner and signatories will have to comply in the future (include the income and answer the FBAR question on the 1040s and file the FBARs).  The question is, with those alternatives, should a taxpayer OVDI or not?  While each specific case is dependent upon the unique facts involved, the question I would like readers to address in comments is the issues the taxpayer and the practitioner should address in making the decision whether to OVDI.  To start that discussion, I quote the following from Charles P. Rettig and Kathryn Keneally, The Last, Best Chance to Disclose Foreign Financial Accounts and Assets—The 2011 Offshore Voluntary Disclosure Program and Beyond!, Journal of Tax Practice and Procedure 33 (Feb.-March 2011):

There are many considerations before a taxpayer should determine whether to participate in the 2011 OVDI. Is the taxpayer a realistic candidate for a criminal prosecution referral by the IRS or prosecution by the Department of Justice? (If so, the determination to participate should be simple and quick). Can that prospect somehow be reduced or eliminated by filing amended or delinquent returns and FBARs in lieu of a direct participation in the OVDI? (and what would be the potentially applicable penalties upon a examination of such returns and FBARs?). Could the government carry the burden of demonstrating that the taxpayer “willfully” violated the FBAR filing requirements? Since the OVDI asserts an offshore penalty based on foreign financial accounts and asset valuations, would the actual offshore penalty determination somehow be less outside the OVDI if limited to financial accounts? Will the government pursue noncompliant taxpayers through the required judicial process following assessment of an FBAR penalty? n9 Might the FBAR related mitigation guidelines set forth in the Internal Revenue Manual (IRM) somehow benefit the taxpayer outside the framework of the 2011 OVDI? Do these mitigation guidelines have any continued viability? How will various of the FAQs under the 2011 OVDI be interpreted in specific taxpayer situations?

A Botched Foreign Account Quiet Disclosure Draws Criminal Charges (5/19/11)

The U.S. Attorney for Masschusetts filed an information against Michael F. Schiavo. The information is here. The gravamen of the misdeed recounted in the information is that Mr. Schaivo attempted a quiet disclosure for his foreign account but that, in that attempted quiet disclosure, he was less than truthful and complete. But, the information seems to say more than that. Readers can analyze the complete information at their leisure. I shall just cut and paste some of the key paragraphs that I think are relevant to professionals and students interested in this subject.

2. At all times material to this Information, HSBC Bank Bermuda Limited ("HSBC Bank Bermuda") (formerly The Bank of Bermuda, Ltd.) was a Bermuda bank headquartered in Hamilton, Bermuda. Beginning in at least in or about 2003 and continuing to at least 2008, Schiavo maintained an account at HSBC Bank Bermuda in which the balance ranged from approximately $65,000 to $150,000.