The Latest on “Noisy” Disclosure of Foreign Accounts
(Or, We hate to say “I told you so” #1, but look here.)
On May 8, at the meeting of the American Bar Association Tax Section, an IRS representative discussed the situation of a taxpayer filing amended tax returns for past years and including previously unreported foreign income from foreign accounts. This is known as a “quiet” disclosure because it contrasts with a taxpayer who formally makes a Voluntary Disclosure, through the established procedure.
Not surprisingly, the IRS representative took a dim view of quite disclosures and stated that a taxpayer who makes a quiet disclosure will not be eligible for terms available to taxpayers who make a formal or “noisy” disclosure.
The open issue is: for clients wishing to make a noisy disclosure, what will the penalties be, after the expiration of the special Voluntary Disclosure Program (VDP) in October, 2010?
The answer is: almost certainly not the same penalty regime as that of the special VDP (including 20% of the highest balance in the account during 2003-2008). The IRS has not advised what the penalties will be for people who come forward now. Everyone we have spoken with at the IRS – – including those at the highest levels administering the VDP – – can offer no guidance, because there has been no official word.
So, for clients who came forward prior to October 2009, we can estimate the penalties with some certainty. For clients who want to come forward now, even with noisy disclosures, we can’t make the same estimates.
But we can advise as follows: Quite disclosure will offer no concessions, no reduced penalties and above all, no understanding that criminal prosecution will be avoided.
There are other problems with “quiet disclosures”. They only address payment of back taxes and interest, but not penalties. Also, they leave open the issue of the taxpayer not having complied with reporting requirements, i.e., filing U.S. Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Account (the “FBAR”), and IRS Form 1040 “check the box”. If the foreign account was in the name of a foreign trust or foreign foundation, then IRS Form 3520 was probably due also. Quiet disclosure does not correct those past non-reporting issues.
Given the current environment – – UBS revealing client identities and accounts, HSBC and Credit Suisse under investigation, the proliferation of Tax Information Exchange (TIE) Agreements, and the new offshore disclosure requirements set forth in the recently enacted HIRE Act – – there is no longer any offshore banking secrecy. Taxpayers with non-declared, non-compliant accounts must come forward. Unfortunately, quiet disclosures are not the prudent way to bring your account into compliance.
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