Posted tagged ‘disclosure’

Are Quiet Disclosures of Offshore Accounts Becoming Even Riskier?

October 18, 2013

By Phil Karter

Is the IRS getting closer to ferreting out “quiet disclosures” by taxpayers who chose that route to address the problem of previously unreported offshore accounts rather than by participating in the Service’s offshore voluntary disclosure program (OVDP)?  That’s the conclusion of an increasing number of tax professionals and if taxpayers in this predicament weren’t already worried, they should be.

A quiet disclosure involves the filing of new or amended tax returns that report offshore income, and FBARs (Report of Foreign Bank and Financial Accounts) that provide other account information regarding the taxpayer’s interest in foreign accounts.  It is a discreet disclosure intended to make a taxpayer compliant with his or her tax reporting responsibilities while avoiding penalties imposed under the IRS’s official voluntary disclosure program.

The IRS has made no secret of its distain for those who choose the quite disclosure route over participation in its voluntary disclosure program.  In its frequently asked questions and answers applicable to the most recent iteration of the OVDP, the Service has cautioned taxpayers that those who have already made quiet disclosures should “be aware of the risk of being examined and potentially criminally prosecuted for all applicable years.”  The IRS has encouraged such taxpayers to “take advantage” of the program before discovery.  The FAQs also note that detection of a quit disclosure also eliminates the possibility of reduced penalty exposure offered under the OVDP. (See FAQs 15 & 16.)

To some, the calculus about whether to participate in the OVDP, follow the quiet disclosure path, or do nothing has been viewed as another form of the audit lottery, albeit one with very high stakes in terms of potential monetary penalties and possibly criminal prosecution.  As virtually everyone should know at this point, offshore account holders can no longer rely on bank secrecy to protect them, so the issue of detecting unreported accounts has become more a question of when, not if. Although a quiet disclosure addresses the unreported account problem, either currently or retroactively, that is not necessarily the end of the story . . . or the risk.

Earlier this year, the Government Accounting Office issued a report in which it noted a dramatic increase in the number of taxpayers reporting offshore accounts, concluding that the trend may reflect attempts to minimize or circumvent taxes, penalties and interest that would be owed if not corrected before detection or even upon participation in the OVDP.  Among other things, the GAO recommended that the IRS explore methodologies to detect and pursue quiet disclosures.  Apparently, the IRS has taken the GAO’s recommendation to heart by working on new ways to identify them.  The effort, according to former Acting IRS Commissioner Steven Miller, was to include “analysis of Forms 8938, Statement of Specified Foreign Financial Assets, to identify specific characteristics of the filing population and to assess filing behaviors indicating potential compliance issues.”

In predicting the effectiveness of this undertaking, it is worth noting that the IRS has a wealth of experience in implementing computer algorithms on a much larger scale to ferret out trends warranting closer scrutiny.  One need look no further than the Services’ Discriminant Function System (DIF), which is used to flag tax returns for possible audit, among the hundreds of millions filed, to appreciate that improved detection of quiet disclosures is well within the IRS’s capabilities.  Therefore, taxpayers who rely on a limited IRS resources justification to ignore the directional trend regarding quiet disclosures are likely to wish they had examined the issue relative to their own personal circumstances a lot more closely. At the very least, given the prevailing wind on this issue, it would be prudent for those who have made quiet disclosures or are contemplating one to revisit the issue with their tax adviser.

Musings in the Aftermath of the First Schedule UTP Filing Season

December 8, 2011

By Phil Karter

As reported earlier this week in the tax press, the recently completed initial filing season for Schedule UTP produced at least one major surprise in the eyes of IRS officials, who had anticipated a much greater number of items listed on the average Schedule UTP than actually materialized.  In fact, the IRS’s predictions were off by a wide margin, with the number of disclosed positions of the 1,500 or so Schedule UTPs filed averaging only slightly more than three items per schedule for CIC taxpayers, and less than two items for non-CIC taxpayers.  Pre-filing expectations of item disclosures had been many multiples higher, perhaps even reaching as high as 100 or more separately stated positions.  Although such predictions may have been wildly optimistic from the IRS’s standpoint, one must now wonder whether the apparent failure of the first filing season to meet the Service’s anticipated disclosure bonanza will hasten efforts to extend the penalty regime to specifically target what are viewed as incomplete or inadequate disclosures on Schedule UTP. (more…)

Good News For Bank Account Disclosures By U.S. Citizens Residing In Canada

December 5, 2011

By Jonathan Prokup

Over the weekend, a variety of Canadian news sources (see, e.g., the Financial Post and the Edmonton Journal) reported on anticipated guidance from the IRS, which would result in the waiver of penalties on certain U.S. citizens living in Canada for past failures to file Form TD F 90-22.1, commonly known as the “FBAR.”  According to the news reports, the IRS will waive failure-to-file penalties for such individuals who file delinquent tax returns and FBARS so long as the individual owes no taxes.  In addition, taxpayers who were unaware of the FBAR filing requirement will be able to file delinquent reports and not be penalized so long as they can demonstrate reasonable cause in a disclosure statement accompanying the delinquent forms.  At this point, it remains unclear how many years of tax returns and FBARs would be required to participate in this new opportunity.  Interestingly, according the articles, taxpayers who participated in (and paid penalties under) the 2009 and 2011 offshore voluntary disclosure initiatives (OVDIs) would be permitted to opt out and reapply for the new zero-penalty offer. (more…)

Is Disclosure On Form 8275-R Required For A Position Contrary To A Revenue Ruling?

April 7, 2011

By Jonathan Prokup

During a webinar the other week regarding the impact of the Mayo Foundation decision on taxpayers, I discussed the effect of Mayo on taxpayers’ decisions to take positions that are contrary to IRS rules or regulations.  Part of that discussion examined the 20-percent accuracy-related penalty that can be imposed on such positions under Code section 6662.

As our readers may know, if a taxpayer takes a position on a return that is contrary to an IRS rule or regulation, the taxpayer may avoid the imposition of the accuracy-related penalty by following the requirements of Treas. Reg. § 1.6662-3.  In general, that regulation provides that, when a taxpayer takes a position contrary to a regulation, the penalty for disregarding rules or regulations does not apply if (i) the position is disclosed on “a properly completed and filed Form 8275-R,” (ii) the position represents a “good faith challenge” to the validity of the regulation, and (iii) the taxpayer has a reasonable basis for the position.  Treas. Reg. § 1.6662-3(a), (c)(1), (c)(2).

At the end of the webinar, an audience member asked whether the requirement to disclose a position on Form 8275-R included a position that was contrary to a revenue ruling.  As so often happens in tax law, the answer creates as many questions as it resolves.  Because one person’s question is likely shared by others, it seems appropriate to discuss the issue in a blawg post.

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So It Begins: The Final Schedule UTP Is Out

September 27, 2010

By Jonathan Prokup

The Internal Revenue Service on Friday released the final version of the much-anticipated Schedule UTP (and accompanying instructions) as well as additional guidance about changes that had been made the schedule.  At the same time, the IRS also announced an expansion of the Compliance Assurance Program (CAP) as well as some other minor matters.  In the face of much criticism of the draft Schedule UTP and instructions, the IRS made a numbers of significant adjustments; however, several issues remain unresolved.

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The Tax Workpapers Conundrum – Will “Justice” Kagan Accept What Solicitor General Kagan Opposed?

July 1, 2010

By Phil Karter

In Tuesday’s confirmation hearings for Supreme Court nominee Elena Kagan, one topic on which there appeared to be agreement between the nominee and the panel was concern about the dwindling number of cases heard by the High Court. In response to questioning from Senator Arlen Specter, Kagan had no explanation for the precipitous decline in the Court’s docket over the last 20 years, but agreed that it has led to an increase in unresolved conflicts among the circuit courts on “vital national issues.”

Quite naturally, those of us in the tax field like to think of our livelihoods as involving “vital national issues,” so perhaps we take it a little personally when the Supreme Court appears to hold a different perspective. The Court certainly surprised many tax professionals in May by declining to hear the Textron case, which presented one of the most prominent “hot-button” tax issues to come along in years. What perfect irony (and timing) it was then on the heels of Kagan’s congressional testimony for the issuance of a decision by the D.C. Circuit the same day in United States v. Deloitte LLP et al., No. 09-5171, that once again accentuated the differing views of the circuit courts on an issue of considerable importance to tax professionals. (more…)


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