May 11, 2010 - Phil Hodgen

The official IRS position on quiet disclosures

In today’s Tax Notes Today (at 2010 TNT 90-1 if you pay the King’s Ransom to Lexis, as I do) there is an article about the May 8, 2010 meeting of the American Bar Association Tax Section.  An IRS representative was present and gave a presentation on the offshore bank account situation.

One of the options available to people who have unreported income from unreported foreign bank accounts is the so-called “quiet disclosure” strategy.  Here you clean up your delinquent paperwork, pay your taxes, and hope for the best.

Read this for the Official Party Line from the IRS on quiet disclosures.  From TFA:

A single question dominated the Offshore Voluntary Compliance Update panel during the American Bar Association Section of Taxation meeting in Washington on May 8. Practitioners wanted to know what special treatment, if any, the IRS would afford taxpayers who declined to enter the government’s special voluntary disclosure program (VDP) and instead filed amended returns revealing previously unreported income from offshore accounts.

The answer was not what those in the packed room wanted to hear. These “quiet disclosures” will not place affected taxpayers on terms equivalent to those who came clean about their offshore activities under the VDP. That means harsh civil and criminal penalties could await those who engaged in quiet disclosure.

But disclosure is disclosure, complained many attendees. Not so, responded IRS officials Ronald Schultz, senior adviser to the deputy commissioner (services and enforcement), Tax-Exempt and Government Entities Division, and Rick Raven, deputy chief of the Criminal Investigation division.

The message was clear: Taxpayers are either in VDP or they’re not. There are no shades of gray. Raven reminded the audience that the inquiry concerned taxpayers who knew about VDP and had ample opportunity to participate in the program, but consciously chose to ignore it. The IRS will not let them slip in through the back door via an amended return.

Quiet disclosures represent an awkward halfway approach to the offshore dilemma. By forgoing VDP — and the obvious IRS scrutiny it triggers — these taxpayers entertained hopes of passing under the radar. The IRS would have its income tax payment, but the offshore investor might avoid penalties and interest out of sheer bureaucratic inattentiveness.

If eventually called on to explain previously unreported income, taxpayers could claim they engaged in an act of voluntarily disclosure; but as Raven and Schultz made clear, it occurred outside the VDP. Don’t expect criminal penalties — perhaps including jail time — to be waived because those enrolled in VDP enjoyed those terms.

At the end of the day, taxpayers may find quiet disclosure could result in the worst possible outcome. The offshore investor will have flagged unreported income for the IRS to see, but without any protection from criminal charges.

You need to understand this position from the IRS when you make your decision about what to do.  If you’re in a position where Bad Things Might Happen (translation:  prison), the quiet disclosure may not be the best solution for you.


Things are rarely as bad as they seem.*

And anyway

And anyway, the IRS has started to engage in a deliberate process of criminal prosecutions DESPITE people entering the voluntary disclosure program.  Doing a noisy disclosure is not a slam-dunk guarantee of protection.  Never was, and less so now.  That’s the point behind the recent public letter to the IRS Commissioner about threats to the integrity of the voluntary disclosure system.


*Sometimes they’re worse!

Voluntary Disclosure