As the deadline for filing individual tax returns approaches, you may be tempted to clean up your act with regards an undisclosed offshore account on a forward looking basis. You could do this by accounting for income in your offshore account this tax year, filing a Report of Foreign Bank and Financial Accounts (FBAR), and amending your previous tax returns to include previously unreported income located in that account. You may think that by taking these actions, your past criminal actions will slide by while you can elude paying penalties and interest on the previously undisclosed account. If so, your reasoning is flawed. The course of action I just described is otherwise known as making a quiet disclosure. Do not fall into the trap of making a quiet disclosure, as apposed to a voluntary disclosure under the OVDI program. In this blog I will explain to you the potential severe adverse consequences of making a quiet disclosure.

First, making a quiet disclosure does not resolve your liability for tax evasion and/or the failure to file FBARs on your foreign accounts in prior years. According to the IRS, persons who either (1) “have a financial interest in or signature authority over at least one financial account located outside of the United States” or (2) have an offshore account with a balance exceeding $10,000 at any time during the calendar year must file an FBAR for such account(s).[1] If the IRS catches you making a quiet disclosure, they have stated publicly that they will civilly and or criminally prosecute you to the full extent of the law. The civil penalty for each count of failing to file an FBAR is up to $10,000 (per account, per year) for a non-willful violation or the greater of $100,000 or 50 percent of the balance of the account (per account, per year) for a willful violation.[2] In addition, the potential criminal penalty for each count of failing to file an FBAR is five years imprisonment and a fine of $250,000 (per count and each year of willful non-compliance is a separate count). [3]

In addition, the IRS has publicly stated that is specifically seeks out taxpayers filing FBAR(s) for the first time while concurrently amending their tax returns. Last year the Government Accountability Office (GAO) asked the IRS to crack down on quiet disclosures by comparing taxpayers’ FBARs to their Form 1040, Schedule B’s to see if this is the first year that taxpayer filed an FBAR and audit that taxpayer if it is.[4] If evidence shows the account in question was not opened this tax year, you have essentially alerted the IRS of your own potentially criminal activity.

Even worse, you will no longer be eligible to make a 2012 Offshore Voluntary Disclosure once the IRS audits you regarding your quiet disclosure!

As you can see, it is incredibly risky to make a quiet disclosure. However, the solution is not to continue praying the IRS will not find out about your undisclosed offshore account. There is a worldwide movement for countries to increase their tax transparency and many countries have already or currently are negotiating information exchange agreements as the result of the Foreign Account Tax Compliance Act (FATCA). FATCA requires foreign financial institutions to disclose to the IRS all alerts in excess of $50,000 that belong to U.S and citizens and green card holders, regardless of whether they live in the U.S. or abroad. Any financial institutions that do not comply with FATCA will incur a 30% withholding tax on all financial transactions. Thus, it is merely a matter of time until the IRS discovers your personal account information.

Seek experienced legal counsel before making a quiet disclosure.  If you have already made a quite disclosure contact us to fix the situation, as we will need to get to the IRS BEFORE they get to you… The Law Offices of David W. Klasing, P.C. can help you make an offshore voluntary disclosure and avoid a potential criminal investigation and subsequent conviction for tax crimes by the IRS. Click here to learn more about our practice.