Posted tagged ‘foreign bank accounts’

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.

Detection Risk Continues To Grow As The IRS Expands Its Offshore Bank Account Investigation Into Liechtenstein

June 12, 2012

By:  Dustin Covello

Late late year, we asked what’s next for foreign bank account holders after OVDI?  Although the answer to this question continues to evolve, it is becoming increasingly clear that the risks of detection have only grown – and will continue to do so.  The latest news on this front comes from Business Week, which reported Sunday that the IRS has requested account holder information from Liechtenstein’s second largest bank, LLB.  Specifically, the IRS has asked for information pertaining to accounts holding $500,000 or more anytime since 2004.  Current and former LLB account holders who continue to hold undisclosed offshore assets now have a rapidly closing window of opportunity to come into compliance before the IRS contacts them for an investigation.  By coming forward voluntarily, an account holder reduces the chance of criminal prosecution and probably qualifies for the miscellaneous 27.5% penalty in lieu of potentially significantly higher tax and FBAR penalties.

LLB’s clients are likely not the only Liechtenstein account holders at significant risk of detection.  Although the IRS’ previous investigation primarily targeted banks, there is anecdotal evidence that the IRS has also begun to pressure Liechtenstein advisors (e.g., lawyers, accountants, trust companies, and the like) to disclose their clients’ identities.  Moreover, if Switzerland is any guide, the IRS will likely expand its Liechtenstein investigation to other banks after establishing a successful precedent with LLB’s likely forthcoming disclosure.

Given the ever-expanding scope of the IRS’ investigation (not to mention FACTA’s new financial-institution withholding and individual-reporting requirements),  any person who previously chose not to disclose his or her offshore accounts should consider reexamining whether risking detection remains prudent.  As of now, OVDI and other methods of coming into compliance — including quiet disclosures and prospective compliance — may still be reasonable choices.  However, all of these options fall off the table if the IRS contacts a taxpayer before disclosure.  Taxpayers in this position should strongly consider contacting an experienced tax advisor to discuss their options.

Going Quietly Into The Night May Not Be The Best Idea For U.S. Citizens Living Abroad

August 26, 2011

Apparently, there are a large number of U.S. citizens living outside the United States as well as a large number of individuals who are dual citizens of the United States and their country of residence (estimated to be in the millions).  Judging from the phone calls that I have been receiving from my contacts at foreign law and accounting firms, a large number of them have recently become aware of the IRS Offshore Voluntary Disclosure Initiative (“OVDI”) providing reduced penalties for U.S. citizens who come forward to report previously undisclosed foreign financial accounts.

The deadline for participating in the program – August 31, 2011 – is rapidly approaching so U.S. citizens living abroad, including dual U.S. citizens, must decide immediately whether to participate in the program.  Many of these individuals have not filed U.S. income tax returns and have not filed Treasury Forms TDF 90-22.1, more commonly knows as the FBAR, to report interests in foreign financial accounts.

A significant number of these individuals appear to be getting advice to make so-called “quiet disclosures.”  An individual making a quiet disclosure does not participate in the IRS’s OVDI, but merely files delinquent or amended income tax returns and delinquent FBARs.  The hope is that the IRS will not discover and audit the taxpayer, or if the IRS does audit the taxpayer, that the taxpayer will qualify for lesser penalties that apply to non-willful violations of the applicable income tax and FBAR provisions.1

For many, following the advice to make quiet disclosures may not be the best approach.  The IRS has created a special reduced penalty regime applicable to U.S. citizens living abroad who have complied with their tax obligations and filings in their country of residence.   For individuals that qualify, the IRS will apply a special 5 percent penalty for failing to report the foreign financial accounts if the individuals make a voluntary disclosure under the OVDI.  The penalty applies to the highest balances in the individual’s foreign financial accounts for the period from 2003 through 2010 so the penalty, although reduced, may still be quite substantial for some.  Nevertheless, the 5 percent penalty pales in comparison to the penalties that might otherwise apply.

The IRS has indicated that it will be looking for individuals who make quiet disclosures and will audit those individuals.  Also, the IRS has stated that it will consider criminal prosecution of those individuals when appropriate.  If criminal prosecution is not warranted, the IRS said that it will impose the maximum penalties that apply, including the penalty for willfully failing to file an FBAR — the greater of $100,000 or 50 percent of the amount in the foreign financial account for each violation.

U.S. citizens living abroad (including dual citizens) are taking a significant risk in filing quiet disclosures, particularly if they would otherwise qualify for the reduced 5 percent penalty under the IRS’s OVDI.  They may find out that their quiet disclosures will not be “quiet” after all and they may face much harsher penalties when the IRS discovers and audits them.

Going quietly into the night may not be the best choice.

1 The individuals may also have been advised that the FBAR penalty can be waived if that taxpayer had reasonable cause for failing to file the FBARs and all income from the foreign financial accounts was reported.  For those individuals living abroad who have not filed U.S. tax returns, the waiver of the penalty would not apply.  The penalty for a non-willful failure to file an FBAR is $10,000 per violation.

Alphabet Soup: HSBC, FBAR, And OVDI (Offshore Voluntary Disclosure Initiative) For Foreign Bank Accounts

April 14, 2011

By Jonathan Prokup

Last week, the United States Department of Justice asked a federal court in San Francisco to force HSBC India to disclose the names of U.S. customers whom the Justice Department suspects are evading U.S. tax laws.  According to the Justice Department’s brief, HSBC India solicited U.S. residents of Indian origin to open bank accounts.  HSBC apparently advised those individuals that the bank would not disclose the existence of the accounts, or any interest earned on those accounts, to the U.S. government. (more…)

IRS Giveth and DOJ Taketh Away: Recent Opinion Jeopardizes Retroactive FBAR Relief

March 8, 2011

By Hale Sheppard

Much confusion has existed over the past few years about filing Form TD F 90-22.1 (“FBAR”) to report foreign accounts to the IRS.  To remedy this, the IRS issued pronouncements in 2009 and 2010 granting certain FBAR filing exemptions and penalty waivers.  Many of these benefits had retroactive effect.  A recent criminal case, United States v. Simon, calls into question the validity of the IRS pronouncements.  By holding that the U.S. Department of Justice may pursue criminal prosecutions in situations where the IRS publicly indicated that it would not even assert civil penalties, this case creates a serious dilemma.  The attached article  analyzes this legal predicament and its impact on taxpayers and tax advisors.  The article is reprinted from January’s edition of the Journal of Taxation

Click here for full article.


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