This is the sixth article in the Offshore Voluntary Disclosure Program (OVDP) Frequently Asked Questions series. This series is intended to provide taxpayers and practitioners with answers to the most commonly asked questions relating to the Internal Revenue Service’s (IRS’s) 2012 OVDP. Other posts in this series, offering a basic description of the OVDP and some of its core requirements, can be found here.
What is the “quiet disclosure” of an FBAR and what are the risks with adopting that approach?
A “quiet disclosure” is when a taxpayer prepares and files the Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) disclosing previously unreported foreign assets or income and pays the corresponding tax and interest. One of the reasons a taxpayer might adopt this approach is that the taxpayer hopes to minimize the financial impact. All that the taxpayer pays is the corresponding tax and interest. The taxpayer utilizing the “quiet disclosure” approach is hoping that the IRS does not notice that the foreign assets or income were not reported and that the IRS just accepts the FBARs as filed. This could be the end of the taxpayer’s case. However, there are significant risks with this approach.
There is always a chance that the IRS examines the FBARs submitted in a “quiet disclosure.” If the IRS selects those returns for examination, the taxpayer is no longer eligible for the OVDP. That means the more beneficial penalty structure is no longer available.
For taxpayers making the “quiet disclosure” who have to file amended returns to complete the disclosure, there is an even greater chance that the IRS examines those amended returns. And again, as soon as an examination is started, the taxpayer is no longer eligible for the OVDP.
The threat of a referral to Criminal Investigation also still exists when a taxpayer chooses to proceed with a “quiet disclosure.” This is a very serious threat. Like with a civil IRS examination, a taxpayer subject to a Criminal Investigation examination is not eligible for the OVDP.
A taxpayer who makes a “quiet disclosure” is eligible for the OVDP if an IRS examination has not been started. This is important as some taxpayers may want the predictability that the OVDP provides after initially proceeding with a “quiet disclosure.” So long as an examination has not been started, that predictability, even though it means being subjected to harsher penalties, is available in the OVDP.