Voluntary Disclosure? Quiet Disclosure? OVDI Amnesty Disclosure? Noisy Disclosure? What should I do if I have unfiled FBARs?
Great questions! This post is a bit more technical than most but it’s an important one. The focus of this post is on voluntary disclosures but first, some basics.
Federal law requires U.S. taxpayers to annually report their foreign financial assets. Reporting is usually done on Schedule B of the income tax return, a FATCA form 8938 and most importantly, on a Report of Foreign Bank and Financial Accounts. FBAR for short.
Although there are penalties for not filing any required tax form, the IRS reserves the most serious penalties for missing FBARs. If the government determines your failure to timely file an FBAR was willful, the penalty is the greater of 50% of he highest account balance or $100,000.
The IRS can and does routinely assess those big penalties. That has taxpayers and their tax preparers asking about the best way to file missing FBARs.
Officially, the IRS favors the current amnesty program (called the Offshore Voluntary Disclosure Program or OVDI). The paperwork is reduced, there is no audit and no threat of criminal prosecution. The problem, however, is the big 27.5% penalty. That penalty isn’t on any unreported income. It’s based on the highest value of the account over the last 8 years.
The flip side is the so-called Quiet Disclosure. That is a fancy way of saying that you simply file the old FBARs, amend your returns and hope the IRS isn’t paying attention. The IRS makes it very clear that taking that route will get you in trouble. The IRS may be slow at times but they have become incredibly adept at finding people who owe penalties.
What’s left? The traditional or voluntary disclosure.
The Internal Revenue Manual says that voluntary disclosures are still recognized. A voluntary disclosure occurs when a taxpayer, usually through a CPA or tax lawyer, approaches the IRS and files the missing and amended forms. Unlike a quiet disclosure which involves sending the forms to an IRS service center and hoping Big Brother’s super computer doesn’t get suspicious, a voluntary disclosure involves coming forward with an explanation as to why the returns were not properly or timely filed.
Does it matter? Absolutely!
If you deliberately didn’t file FBARs, amnesty is a great deal. In addition to the high civil penalties, failing to file an FBAR can also be a felony punishable by prison. Amnesty eliminates the prosecution and 50% penalty risk. Taxpayers who were truly unaware of their filing requirements or relied on bad tax advice can do much better with a voluntary disclosure, however. The penalties can be as low as $10,000 per year or even a simple warning letter.
The downside of the voluntary disclosure process is that there are no guaranties. With the OVDI program, you know pretty much what will happen, although a good FBAR lawyer can sometimes reclassify accounts to fit in smaller penalty categories. When you go the voluntary disclosure route (called an “opt out” if you have been already admitted to the amnesty program), there are no guaranties.
As to the civil penalties, a recent GAO study showed taxpayers usually faired better going the voluntary route. Of course, smart tax lawyers are only steering clients with good cases into a voluntary disclosure.
What about criminal penalties? Those are rare to begin with. According the the Internal Revenue Manual, criminal prosecutions are generally not recommended if the disclosure is made before:
a) the IRS starts an audit or investigation;
b) the IRS gets the information from the media or a third party; and
c) the IRS has not received the information from a John Doe or other type of subpoena.
One big exception to all these rules is illegal source of income. If you are a drug dealer, neither amnesty nor voluntary disclosure may work.
In practical terms, the IRS has what is called a “First Contact” policy. If you get to the IRS first, they usually won’t prosecute. But if you have already received an audit notice or read in the paper that the IRS is investigating your offshore bank, it may be too late. You can read more directly from the IRS Criminal Division internal policy section on voluntary disclosures.
So what should YOU do? The decision on how to come into compliance and file missing FBARs has huge implications. Generally we recommend most people start with the amnesty program. It stops the clock and although you can always change your mind and opt out, you can’t opt in.
Once you are in amnesty, you and your tax adviser need to make some tough choices. We have handled many of these cases and each one is different. Our best advice? Find a good FBAR attorney to explore your options and help you make the best choice.
For more information and a no cost review of your situation, contact us today. Our team of IRS attorneys have helped taxpayers across the world with FATCA and FBAR problems. We usually offer flat fees for our services. Because we handle many of these cases, we can offer our services for less cost than many other tax lawyers.
Post by Brian Mahany, Esq.