Considering a "Quiet Disclosure" Instead of OVDP & Its 27.5% Penalty? Such a Strategy Is Not Without Risk as Florida Man Discovers.

Quite frequently, I have clients who want to simply file three years of amended individual income tax returns and FBARs (commonly referred to as a "quiet disclosure") as an alternative to making a voluntary disclosure of a foreign bank account under the 2012 Offshore Voluntary Disclosure Program ("OVDP") and paying the one-time penalty of 27.5% of the highest account balance over the last eight years. Their hope is that the IRS will simply accept their amended returns, cash their checks for the back taxes, and not follow up with questions about the history of the offshore account and/or whether FBARs were filed for the account in prior years.

I routinely advise against this "quiet disclosure" strategy for dealing with an undisclosed foreign bank account, since the IRS is currently paying particular attention to amended returns in an effort to "flag" these back-door attempts to dodge FBAR penalties for prior noncompliance.

The current IRS scrutiny of amended returns was triggered, in part, by a recent GAO audit of 2003-2008 amended tax returns, pursuant to which the GAO matched the reviewed amended returns to offshore bank accounts and discovered more "quiet disclosures" than the IRS was initially aware of.

As a result of this audit, the GAO recommended that the IRS develop procedures to more effectively detect and pursue "quiet disclosures," including an examination of Schedule B to Form 1040 to see if the taxpayer has checked the box indicating the existence of a foreign account. If such taxpayer has checked the box on the current year return, but had not checked the box on prior returns, the GAO recommended follow-up action by the IRS to determine whether FBAR filing obligations have been met in prior years.

If the IRS detects the "quiet disclosure" and follows up with a conventional audit, the account holder will likely lose the entire account balance and possibly more (due to the imposition of the $100K/50% penalty per account per year for "willful" failure to file FBARs) as opposed to roughly one-third of the account if he/she participates in the OVDP.

An 87 year-old Florida man recently learned this lesson the hard way, as it appears he tried a "quiet disclosure" and, after detection, was denied entry into the OVDP and subjected to the draconian FBAR penalties. After a trial, he was ordered to pay more than $2.2 million in civil penalties for his failure to file FBARs for a Swiss bank account valued at approximately $1.5 million. Had this taxpayer sought entry (and been admitted) into the OVDP prior to and instead of the ill-fated "quiet disclosure," he probably could have retained around two-thirds of his Swiss account instead of losing the entire account and owing U.S. tax authorities another $700,000.

With the rollout of FATCA and USDOJ-sponsored amnesty programs for foreign banks (like the amnesty program currently in place for Swiss banks), the "offshore bank secrecy" game is basically over. As such, there is very little chance in this new environment of transparent offshore reporting that a foreign bank account controlled by an American will go undetected by U.S. tax authorities. Therefore, absent special circumstances participation in the OVDP is the safest and most prudent course of action to take regarding a previously undisclosed foreign bank account.

If you are a U.S. citizen or U.S. resident (including green card holders) and you have or had an undisclosed offshore bank account, you should seriously consider applying for acceptance into the OVDP and taking advantage of the criminal immunity, capped civil penalties, and other protections offered under this program. Contact us at the Law Office of Michael K. Miller, P.A. and we will be happy to discuss with you the specific details and requirements of this program and any other options you may have.