In Part I, we listed some of the penalties associated with the failure to report foreign accounts, and what is widely regarded as the best option for coming into compliance – the Offshore Voluntary Disclosure Program (OVDP). In this post, we are going to introduce two other options: Streamlined Filing Compliance and Quiet Disclosures.
Streamlined Filing Compliance
If you and your tax attorney think that you can demonstrate to the government’s satisfaction that your failure to report was not willful, Streamlined Filing Compliance procedures may be a possibility.
Meeting the requirements for Streamlined Filing Compliance is extremely difficult. For one thing, you must prove that your failure to report your foreign income, pay your taxes, and submit all of the required information returns (including FBARs) was not willful. In addition, if the IRS has already initiated a civil examination of your tax returns for any taxable year, or a criminal investigation, you are ineligible – even if the examination or investigation is entirely unconnected with your foreign assets.
If you manage to succeed with this compliance method, the tax penalty is only 5%. Streamlined Filing Compliance is available to individual U.S. taxpayers residing both inside and outside the United States, and to the estates of individual taxpayers.
The “Quiet Disclosure”
Tens of thousands of taxpayers each year file “Quiet Disclosures” – amended returns, delinquent FBARs and other foreign account disclosures – and hope that they won’t get caught.
The result can be disastrous. The IRS has been promoting the OVDP for many years and wants taxpayers in it – it is therefore increasing its scrutiny of Quiet Disclosures and as a result, they can now serve as a red flag for an audit. Quiet Disclosures are definitely not for taxpayers who never filed and/or whose taxable income would change as a result of an amended filing.
Quiet Disclosures may be prudent in limited circumstances, such as where the taxpayer has no financial interest in an account but is listed as a signatory (e.g., the child of a foreign account owner). Note that if a delinquent FBAR form is filed, the IRS recommends that an explanatory letter be included, although this still does not guarantee that the taxpayer will avoid FBAR penalties.
A Quiet Disclosure should never be done without professional tax assistance.
Other, Less Utilized Options
There also are other voluntary disclosures (laid out in IRS manual 9.5.11.9) that may be worth exploring with your tax advisor.
The tax preparation team at Moskowitz, LLP assists many U.S. taxpayers come into compliance with their foreign account reporting. Part III, our last post in this series, will focus on the information your tax team will need to help you.