For taxpayers who entered the IRS’s second Offshore Voluntary Disclosure Initiative (“OVDI”) prior to August 31, 2011, November 29th marked the end of the extended deadline that some taxpayers requested for submitting all of the materials included in the disclosure (e.g., amended returns, FBARs). Coincidentally with the timing of this deadline, many individuals who only recently learned of their reporting obligations (or, in some cases, of the existence of their accounts in the first place) are asking themselves what they can do now, having missed the opportunity to participate in the OVDI.
While voluntary disclosures have long been a part of IRS procedures, in some respects, the post-OVDI enforcement environment is a brave new world. On the one hand, having gotten thousands of individuals and companies to come forward under the terms of the first two OVDIs, the IRS may view post-OVDI disclosures of foreign bank accounts with suspicion. After all, the thinking goes, post-OVDI disclosures may reflect an effort to negotiate a better deal from revenue agents than the disclosing individuals and companies would have received under the initiatives. On the other hand, unless the IRS believes that it can establish that an individual or company willfully violated the FBAR requirements, the penalties that can be imposed on disclosing taxpayers are relatively limited.
Accountholders who find themselves in this position generally have three options available to them: (i) comply with the obligations prospectively without disclosing prior noncompliance, (ii) making a “quiet” disclosure by simply filing FBARs and amended returns, or (iii) making a “noisy” disclosure by affirmatively contacting the IRS and telling them that the delinquent FBARs and amended returns are being filed.
In cases involving a risk of criminal prosecution or an imposition of the penalty for a “willful” failure to file FBARs, practitioners typically steer their clients towards a noisy disclosure. (For reference, a willful failure to file an FBAR carries, for each year in which a violation occurs, a penalty equal to the greater of $100,000 or 50 percent of the account balance at the time of the violation.)
In contrast, where the client has sympathetic facts or otherwise minimal criminal exposure, practitioners often advised their clients to pursue a “quiet” disclosure. As we have noted, however, in the context of the 2011 OVDI, the IRS warned taxpayers about the risks of pursuing “quiet” disclosures in lieu of participating in OVDI. Consequently, taxpayers – even those with minimal criminal exposure – may face increased scrutiny by pursuing a quiet disclosure.
So, what’s a taxpayer to do? The first thing to keep in mind is that continuing non-compliance is simply not an option. Not only do professional responsibilities require practitioners to say such things, it’s also the smart move. Continuing to shirk compliance obligations is a recipe for eventual disaster.
While some practitioners may advise previously non-compliant taxpayers to comply prospectively and not worry about past violations, this advice must considered very carefully and with full knowledge of the risks. If a taxpayer chooses to comply prospectively and the IRS identifies prior non-compliance, the lack of any remedial measures may reduce the taxpayer’s ability to seek leniency on the grounds that the taxpayer did not act willfully or did not act with reasonable cause.
If a taxpayer chooses to make a disclosure, what route is better quiet or noisy? The answer to that question will necessarily depend on the particular facts of the taxpayer’s situation. As has always been the case, in more serious circumstances that may implicate criminal statutes, a noisy disclosure is still all but essential. For less egregious circumstances, however, the question remains answerable only by weighing the risks of the taxpayer’s particularly facts and exercising judgment about how to proceed.
A noisy disclosure will typically be more expensive (initially) than a quiet disclosure because the taxpayer is guaranteeing that the IRS will learn of all disclosed violations, which will require the payments of all related taxes, interest, and even penalties. Using a noisy disclosure, however, is somewhat akin to purchasing an insurance policy. By paying a greater amount through complete disclosure, the taxpayer is attempting to avoid the risk of paying substantially greater amounts in the future – e.g., if the IRS were to assert the onerous penalty for a willful failure to avoid the FBAR filing obligation.
There can be no guarantees of whether the noisy disclosure will be worth the increased cost; but as we often tell our clients, the proper course of action will depend upon both the specific facts for each taxpayer and the taxpayer’s own appetite for risk. We can offer our readers only one certainty: non-compliance is not an option, and be wary of any practitioner who tells you otherwise.