In the last several years, some 39,000 taxpayers have come forward through IRS amnesty programs and disclosed their interests in unreported foreign accounts. The General Accounting Office (GAO) says that countless others have tried to avoid penalties and come into compliance through the back door by making so called “quiet disclosures.” Although we have long warned about the risks of quiet disclosures, many taxpayers think they can avoid all penalties by simply reporting their foreign account in the current year and hoping the IRS doesn’t ask any questions. On June 11th, the United States Department of Justice filed a complaint against one such individual.
According to the complaint, Carl Zwerner of Miami, Florida had an unreported foreign account in ABN AMRO Bank of Switzerland. U.S. taxpayers are required to report foreign financial holdings – bank accounts, hedge funds, CD’s, brokerage accounts and even some retirement and insurance products – if the aggregate value of those holdings exceeds $10,000. Reporting is done on one’s income tax return and on a Report of Foreign Bank and Financial Accounts, better known as an FBAR.
The feds say that for several years Zwerner never filed FBARs. Rather than approach the IRS and make a voluntary disclosure, Zwerner apparently decided to go the quiet disclosure route. The IRS says he simply filed an FBAR for 2008 and amended his old returns to account for some unreported interest income.
According to the GAO, many other taxpayers attempt the same quiet disclosure route that Zwerner did. We believe the recent Justice Department action is in direct response to the GAO report. If you think simply amending a return or filing in the current year will avoid the problem, it won’t.
Why did Zwerner go the quiet disclosure route? We will never know for sure but anecdotally, many taxpayers are put off by the high penalties associated with amnesty. Under the current amnesty program – the Offshore Voluntary Disclosure Program or OVDP – the feds will levy a one time 27.5% penalty based on the highest balance in the unreported accounts over the last 8 years. That’s a hefty penalty but it only tells part of the story.
There are other programs available for Americans living abroad (expats), for those who foreign holdings never exceeded $75,000, for so called accidental Americans and for those who can prove their failure to file an FBAR and report their offshore accounts was not willful. The latter is known as a voluntary disclosure. If you can prove your actions were innocent, the penalties may be as low as $10,000 or even no penalty.
So what will happen to Zwerner? The feds are seeking to collect a penalty of 50% of the highest balance of his account for each year the Swiss account wasn’t reported! In his case, it appears that a $1.5 million account will yield a penalty of $3 million! That means the penalty is far greater than the total amount of money he had in the account.
The lesson here is that the IRS might be a bit slow but simply making a quiet disclosure really is a terrible idea. You may avoid some penalties for a a couple years but when the day of reckoning comes, it will be very, very expensive.
If you have recently made a quiet disclosure and are having second thoughts or have not filed FBARs in past years and are wondering how to best come into compliance, give us a call. We have helped many taxpayers and financial institutions with questions or concerns about FATCA (the Foreign Account Tax Compliance Act) and FBARs. For more information, contact attorney Bethany Kroes at or by telephone at (414) 223-0464. All inquiries are protected by the attorney – client privilege and kept in complete confidence.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. IRS tax related services available worldwide.
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Written by Brian Mahany, Esq.