With Quiet Disclosures Under Fire, Consider Opting-Out of OVDI/OVDP (Qualified Quiet Disclosure)?
In the past, the IRS has been lenient with taxpayers that file FBARs and other tax returns past the due dates through quiet disclosures, or essentially not using the voluntary disclosure program (OVDI/OVDP) to become compliant. Often, these taxpayers believed that their circumstances warranted the general “reasonable cause” provision and reduced FBAR penalties or even a warning letter, which are not available through OVDP. Still, others were trying to sneak in the delinquent FBARs in the hopes of the IRS not discovering the tardiness of the filings so they wouldn’t have to worry about any penalties at all. Not many considered entering the voluntary disclosure program, then opting-out of OVDI/OVDP, commonly referred to as a qualified quiet disclosure .
Unfortunately, this leniency no longer exists. After a scathing report issued by the Government Accountability Office (GAO) in March 2013, the IRS is now doing a much better job at flagging quiet disclosures, then taking a hardline position with the taxpayers they catch. If you are in a situation that you are behind on your filings and are considering a quiet disclosure, please read below to find out whether an OVDI/OVDP opt-out, or qualified quiet disclosure, might be more beneficial for you. If you would like to speak with a tax attorney with extensive experience in this area, feel free to contact us.
IMPORTANT UPDATE: Major changes to the OVDP program took effect July 1, 2014. Although opting out is still an available option, many people now qualify for a reduced penalty of 5%. With these changes, a lot of taxpayers may choose to simply pay the 5% penalty rather than entering the 2014 OVDI program then opting-out. Read about the new updates here:
What is a Quiet Disclosure?
While no formal definition exists, a quiet disclosure is an attempt by a taxpayer to file or amend previous years’ tax returns and FBARs without alerting the IRS to the circumstances. Through a quiet disclosure, a taxpayer would be subjected to the normal structure that gives the IRS agents significant latitude to assess FBAR penalties up to statutory maximums. Such penalties are not fixed (like with OVDI/OVDP) and in some circumstances, an agent might not assess any penalties.
According to the IRS employee handbook, “The purpose of the FBAR penalties is to promote compliance. In exercising their discretion, examiners should consider whether the issuance of a warning letter would achieve the desired results. ” (I.R.M.§22.214.171.124(4))
However, while the IRS agents have discretion to issue a warning letter, they also have the discretion to assess massive FBAR penalties. In this sense, a quiet disclosure is like rolling the dice. It is possible for taxpayers to avoid the fixed penalty structure and legal costs associated with the OVDP and still come out ahead, even if they are caught. It is also possible for delinquent taxpayers to wish they had chosen the relative certainty of the fixed structure, rather than having to pay the statutory maximum for FBAR penalties, and sometimes even facing criminal prosecution. Because of recent policy changes, quiet disclosures have been getting increasingly risky, and their use has been diminishing.
What happened to the Quiet Disclosure?
In a GAO report entitled “Offshore Tax Evasion: IRS Has Collected Billions of Dollars but May Be Missing Continued Evasion”, the GAO condemned the leniency attributed to quiet disclosures and the inability for the IRS to assess penalties on late filings. The question was raised about whether a voluntary disclosure program such as OVDI or OVDP could be effective when taxpayers often had significant reason to believe that a quiet disclosure could avoid such headaches. Importantly, the GAO noted that the Treasury was failing to generate substantial revenue from quiet disclosures that otherwise would be gained through the OVDP.
Since the harsh GAO critique, things have changed. IRS examiners have become much more aggressive with assessing FBAR penalties through quiet disclosures to send the message that the voluntary disclosure program is a better option. They have developed new procedures to trace and match delinquent filings and disclosures, making it much less likely for taxpayers that were trying to “sneak into compliance” to fall under the radar. Rather, these taxpayers are often audited, assessed substantial penalties, interest, and are potentially subjected to criminal prosecution.
Yet, it still remains… what about reasonable cause? Can taxpayers that would have been a candidate for a warning letter and FBAR penalty waiver still receive the beneficial treatment that they were afforded in the past?
Most likely, not through a quiet disclosure… the suspicion is that any taxpayer, regardless of the circumstances, is looking to hide something by not going through the OVDP process. However, there might still be another option: .
Qualified Quiet Disclosures: Opting-Out of OVDI
While other articles on this website cover the OVDP/OVDI programs in far greater detail, the most important point is that the OVDI is seen as “coming clean” by subjecting oneself to the fixed penalty structure and requirements of the program. With the current environment for quiet disclosures, it might also be worthwhile to consider an opt-out of OVDI at the last minute (Quiet Disclosure).
Entering the OVDP, you will bring attention to your accounts and show that you do not have anything to hide. This will help you to avoid an overly-aggressive auditor under a quiet disclosure that already believes that you were trying to deceive the IRS. At the same time, through an opt-out of OVDP, you can still “roll the dice” with FBAR penalties. Rather than being assessed the fixed-penalties, you would be under the discretion of the IRS examiner, who will determine the appropriate amount of FBAR penalties to assess. This time, however, you would have removed the suspicion that you were hiding from the IRS by having disclosed all of your account and asset information in the earlier steps of the program.
Taking this approach has its risks. The decision to opt-out is final, and cannot be undone. Before making this choice, it is important that you have your situation reviewed by a tax attorney with extensive experience in the field, so that he/she can give you an honest assessment of your chances of getting the penalties waived.
Read More about the IRS Voluntary Disclosure Program
The OVDP Opt-Out (Qualified Quiet Disclosure) Process
Opting-out starts when you have already gone through most of the OVDP process. When your IRS agent presents you with a closing letter to sign at the end of the OVDP process, you should let them know that you are considering opting-out. You will then have to write and send an opt-out letter to your agent, outlining your position on why you believe your situation warrants a warning letter rather than FBAR penalties.
The IRS agent will then want to ask you a series of questions about your foreign account and the circumstances surrounding your decision to open it. They will also decide whether or not they want to conduct a full audit of the amended returns you filed during the OVDP process.
If they decide to audit the returns, you need to vigorously defend the audit, and make sure that they do not find any significant mistakes. If there are errors in the tax return, the agent is likely to take a highly aggressive approach in their penalty decisions.
After the audit, if there is one, the agent will consider your circumstances before making a recommendation to their manager the level of penalties that should be assessed. The manager then either approves the agent’s recommendation, or makes a different decision, and notifies you by writing. If you disagree with their decision, you have will the option of taking your case to the Office of Appeals for reconsideration.
Before making the choice to do a qualified quiet disclosure or opt-out of OVDP, it is important that you carefully consider all of the different options and consequences before making any decisions. It is highly recommended that you seek the advice of a qualified tax attorney to help you understand the implications of your choices as well as how they might apply to your specific set of circumstances. Feel free to contact us for a confidential conversation with an experienced tax attorney about your situation.[author] [author_image timthumb=’off’]https://www.ayarlaw.com/wp-content/uploads/2013/02/venar-about-sm.jpg[/author_image] [author_info]Tax lawyer Venar R. Ayar, founder of Ayar Law Group, holds ten years of experience as an accounting specialist and tax lawyer. He earned his Juris Doctor at the University of San Diego School of Law, receiving a Master of Laws in Taxation—the highest degree available in tax. His specialty is in resolving all types of federal and state tax problems. Representing clients before the IRS, Ayar’s practice and experience has proved him as an honest and dedicated leader in the realm of tax lawyers. Throughout his career, Ayar has helped many taxpayers from all around the U.S., and around the world, navigate the OVDI/OVDP program and its alternatives, including the qualified quiet disclosure, and getting them current with their FBAR reporting requirements. Click here to contact tax lawyer Venar Ayar.[/author_info] [/author]