FBAR Quiet Disclosure
Contents
FBAR Quiet Disclosure Dangers
Over the past several years, the Internal Revenue Service has significantly increased enforcement of foreign accounts compliance and timely filing of international information reporting forms. Some of the common forms you may be familiar with include the FBAR, FATCA (Form 8938), and Form 3520 (Foreign Gifts and Trusts). When a person fails to file these forms timely, they may become subject to fines and penalties. And in general, the fines and penalties tend to severely outweigh the noncompliance. This, in turn, causes many rational people to sometimes consider questionable disclosure strategies to get into compliance and avoid the IRS penalty machine. One method that some Taxpayers may consider is a quiet disclosure. With a quiet disclosure, a taxpayer tries to sneak in their foreign account information forms to the IRS without going through one of the offshore amnesty programs — or submitting a reasonable cause package in the hopes that they can avoid detection and fly below the radar. This type of submission can be dangerous; here are five reasons why quiet disclosures are dangerous.
Willful FBAR Penalties are Dangerous
The first and most important aspect of why it is dangerous to make a quiet disclosure is that if a Taxpayer knowingly fails to enter one of the amnesty programs and instead tries to circumvent the IRS submission procedures with a quiet disclosure — and the IRS catches them — they will presume the Taxpayer is willful. By being willful as opposed to non-willful, the Taxpayer may end up with significantly higher fines and penalties — and even possibly an IRS Special Agent Investigation depending on the faction circumstances of the situation.
Potential Criminal Investigation
The reason the IRS developed all these different amnesty programs is that they want taxpayers to enter into the programs in order to safely get into compliance for missed and undisclosed foreign accounts, assets, investments, and income. Over the years, the IRS has made it known that if they catch someone in a quiet disclosure, it may lead to more significant penalties and even a criminal investigation. The same goes for making willful submissions into the Streamlined Procedures — which in recent years has actually led to criminal investigations and prosecutions.
Ineligible for Streamlined
Some Taxpayers find out all too late that they could have qualified for the Streamline Domestic Offshore Procedures or even the Streamlined Foreign Offshore Procedures — with the latter being an opportunity to avoid all fines and penalties. When coupled with the Foreign Earned Income Exclusion and application of Foreign Tax Credits, even high net worth and high-income taxpayers may avoid all penalties and taxes. The problem becomes that if a person submits a quiet disclosure, it would be difficult to go back and sign a non-willful certification under penalty of perjury.
Ineligible for DFSP
If the only issue a taxpayer has is that they missed reporting FBAR — and while the procedures are still available — the taxpayer may be able to enter into the Delinquent FBAR Submission Procedures. At the current time, the IRS waves penalties only if the only required form that was missed was the FBAR, but this can change at any time. Likewise, if Taxpayers have more than FBAR reporting (FATCA, Form 3520, Form 5471) then they would not qualify for this procedure — instead would qualify for the Delinquent International Information Return Submission Procedures (DIIRSP).
*After November 2020 the IRS no longer guarantees an automatic penalty waiver under this version of the program.
Ineligible for Reasonable Cause
If a person knowingly makes a false statement or omission to the IRS by way of a quiet disclosure, then they would no longer qualify for the reasonable cause exception to penalties. In order to qualify for reasonable cause, the taxpayer cannot have acted intentionally (misrepresentation or omission) when making a quiet disclosure.
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