Perhaps you’ve heard stories of how many taxpayers who had previously never disclosed their offshore accounts to the IRS have been quietly disclosing their accounts’ existence in an attempt to avoid some penalties that the IRS might assess for their previous failure to file FBARS. This practice typically involves simply filing a Report of Foreign Bank and Financial Accounts and then staying in compliance from that point forward. Usually, this involves amending previous tax returns as well. For a variety of reasons the quiet disclosure strategy may not be viable for much longer.
The fact is that this strategy actually does nothing to comply with the law, since it is an intentional attempt to circumvent the penalties that apply under the Offshore Voluntary Disclosure program. That program is the doorway through which the IRS wants everyone with one of these secret accounts to step on their way to legal compliance. When the GAO audited the FBAR filings a few years ago, they discovered that there had been a sharp uptick in the number of first-time filers – which led them to conclude that the IRS was doing a poor job of catching people who were evading the preferred system.
Here’s the thing though: you can face criminal prosecution if the agency determines that you intentionally avoided the FBAR filing requirements. Criminal penalties can include sizeable fines, as well as prison time. The only way you can be sure to avoid those criminal penalties is by participating in the Offshore Voluntary Disclosure program. The other options, including quiet disclosure or just hoping that you never get caught, provide no such protections.
While thousands of taxpayers are believed to have simply mailed in their missing forms along with amended tax returns for previous years, that choice can invite trouble. In the wake of the GAO’s discovery that there were far more quiet disclosures than the IRS had previously believed, the Internal Revenue Service was advised to begin more aggressive action to stop those backdoor attempts at compliance. The Agency accepted those recommendations, which means that quiet disclosure may actually now bring exactly the type of negative attention those filers seek to avoid.
As for how they would do that, the answer is simple. If they see that the foreign account box is checked on your Schedule B, as required by law, but was not checked in the previous year, that raises a red flag. The obvious question they would ask at that point is when you actually opened the account. And if they can determine that the account was not opened within the last tax year, you can probably expect an audit or other investigative action.
That leads to one more question: what should you do? Well, the option you choose should be based on your individual circumstances. There are obviously cases where you have no real tax burden on a smaller account, and that may make it worth your while to pursue a quiet disclosure strategy. If, on the other hand, there is even the slightest chance that you might be liable for larger penalties or even criminal prosecution, the only safe path is to seek the amnesty that the IRS voluntary disclosure offers.