What is the Penalty for Quiet Disclosure

What is the Penalty for Quiet Disclosure

Quiet Disclosure Penalty

Quiet Disclosure Penalty: When it comes to Foreign Accounts Compliance and FBAR/FATCA violations, making a quiet disclosure to the IRS is a very risky proposition. The reason why it is such a risky proposition, is because of the quiet disclosure penalty. When a US Person makes a quiet disclosure, they are intentionally omitting or misrepresenting their foreign account compliance to the Internal Revenue Service and FinCEN — this usually involves filing past returns outside of the amnesty program and/or just filing forward. Not all Taxpayers will get caught, but for the unlucky Taxpayers who get caught in acquired disclosure or silent disclosure — it may very well end up being investigated by the IRS Special Agents, and may become a willful and criminal violation of FBAR, FATCA and more. But, almost always (unless tax evasion and other crimes are also at issue), penalties are limited to civil violations.

Let’s take a look at the quiet disclosure penalty risk.

IRM and Quiet Disclosure Penalty

The Internal Revenue Manual recently updated the chapter as to Quiet Disclosure, as follows:

4.63.3.20 Quiet Disclosures

      • A quiet disclosure is made when a taxpayer files a series of amended tax returns to report previously unreported income from previously undisclosed foreign financial assets outside of the formal voluntary disclosure practice provided for by IRM 9.5.11.9.6.

      • In most quiet disclosure cases, taxpayers also file delinquent FBARs to report previously undisclosed foreign accounts. IRM 3.11.6.4.5.3, Offshore Voluntary Disclosure Program – Quiet Disclosure Cases, requires the campuses that receive amended tax returns reporting foreign attributes to forward them to the Quiet Disclosure Coordinator in OVDP for review.

Exhibit 4.63.3-4 Incoming Mail Procedures

      • If there are Forms 1040X with foreign sourced income and/or foreign information returns (5471, 5472, 886, etc.) these may be Quiet Disclosures and will go to the Quiet Disclosure Coordinator.

Quiet Disclosure Leads to FBAR Willfulness

FBAR refers to Foreign Bank and Financial Accounts — which is reported annually on FinCEN Form 114. US persons who have an annual aggregate account value totaling more than $10,000 on any day of the year are typically required to file the annual FBAR. When a taxpayer does not timely file the FBAR — or files an inaccurate FBAR — they may be subject to fines and penalties. FBAR penalties can be either civil or criminal in nature. Despite all the fear mongering you will undoubtedly find online the majority of penalties are civil.  Therefore, under most circumstances the biggest threat to taxpayers is to there finances — and not their freedom.

31 USC 5321

Civil FBAR Penalties are codified in 31 USC 5321.

      • (C)Willful violations

      • In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—

      • (i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of— (I)$100,000, or (II)50 percent of the amount determined under subparagraph (D), and (ii)subparagraph (B)(ii) shall not apply.*

What makes the title of USC so important, is that Taxpayers will notice that it is not title 26 which is the Internal Revenue Code — but rather title 31, which refers to Money and Finance code. Thus, while the Internal Revenue Service is tasked with enforcing FBAR penalties, FBAR reporting is not covered under the Internal Revenue Code — and not technically a tax or tax penalty. This puts taxpayers in a tough position when they want to litigate an FBAR account violation penalty, because they cannot dispute FBAR penalties in tax court.

*The $100,000 value adjust for inflation. it used to be that the IRS could recover 50% per year up to 300% value of the account (50% *6), But that was reduced to 100%.

IRM 4.26.16.6.5.1: Willful FBAR Violations

The IRM is the Internal Revenue Manual. While it has no “force of law” it is relied upon by the IRS personnel — and it gives Taxpayers some insight as to how the IRS agent will treat certain violations — include willful FBAR violations.

 Willful FBAR Violations – Defining Willfulness

      • The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.

      • A finding of willfulness under the BSA must be supported by evidence of willfulness.

      • The burden of establishing willfulness is on the Service.

      • Willfulness is shown by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements. In the FBAR situation, the person only need know that a reporting requirement exists. If a person has that knowledge, the only intent needed to constitute a willful violation of the requirement is a conscious choice not to file the FBAR.

      • Under the concept of “willful blindness,” willfulness is attributed to a person who made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements.

Example:

      • Willful blindness may be present when a person admits knowledge of, and fails to answer questions concerning, his interest in or signature or other authority over financial accounts at foreign banks on Schedule B of his Federal income tax return. This section of the income tax return refers taxpayers to the instructions for Schedule B, which provides guidance on their responsibilities for reporting foreign bank accounts and discusses the duty to file the FBAR. These resources indicate that the person could have learned of the filing and recordkeeping requirements quite easily.

        It is reasonable to assume that a person who has foreign bank accounts should read the information specified by the government in tax forms. The failure to act on this information and learn of the further reporting requirement, as suggested on Schedule B, may provide evidence of willful blindness on the part of the person.

      • Note: The failure to learn of the filing requirements coupled with other factors, such as the efforts taken to conceal the existence of the accounts and the amounts involved, may lead to a conclusion that the violation was due to willful blindness. The mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, in itself, to establish that the FBAR violation was attributable to willful blindness.

Section 31 U.S.C. § 5322 – Criminal Willful Penalties

The criminal penalties for willfully not filing the FBAR are intense, and are as follows:

      • (a) A person willfully violating this subchapter or a regulation prescribed or order issued under this subchapter (except section 5315 or 5324 of this title or a regulation prescribed under section 5315 or 5324), or willfully violating a regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508, shall be fined not more than $250,000, or imprisoned for not more than five years, or both.

      • (b) A person willfully violating this subchapter or a regulation prescribed or order issued under this subchapter (except section 5315 or 5324 of this title or a regulation prescribed under section 5315 or 5324), or willfully violating a regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508, while violating another law of the United States or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, shall be fined not more than $500,000, imprisoned for not more than 10 years, or both.

      • (c) For a violation of section 5318(a)(2) of this title or a regulation prescribed under section 5318(a)(2), a separate violation occurs for each day the violation continues and at each office, branch, or place of business at which a violation occurs or continues.

      • (d) A financial institution or agency that violates any provision of subsection (i) or (j) of section 5318, or any special measures imposed under section 5318A, or any regulation prescribed under subsection (i) or (j) of section 5318 or section 5318A, shall be fined in an amount equal to not less than 2 times the amount of the transaction, but not more than $1,000,000.

FBAR Criminal Willful Penalties – Beyond a Reasonable Doubt

If a person is being charged with a crime, and their freedom is at stake, the burden to provide guilt increases, so that the US government must show that beyond a reasonable doubt they have willfully violated the law, and they must be charged in a criminal procedure.

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Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and Quiet Disclosure Penalty avoidance.

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