The Qualified Quiet Disclosure: Operating Outside Of The IRS Offshore Voluntary Disclosure Initiative

more+
less-

Individuals with previously undisclosed foreign assets and/or income have a variety of options to become compliant with the IRS, with two avenues for resolution being the most common:  Qualified Quiet Disclosure and the Offshore Voluntary Disclosure Program ("OVDP").

Absent facts indicating willful or reckless intent, an individual may be better off ‘explaining’ the undisclosed foreign bank accounts through amended tax returns, rather than opting into the Offshore Voluntary Disclosure Program.  Though the IRS prefers everyone opting into the OVDP because the IRS has collected so much money from it, there is another avenue known as a "Qualified Quiet Disclosure."  The IRS has also blessed the "qualified quiet disclosure" which, if a person qualifies, gives the same forgiveness as the OVDP but without paying the heavy penalties, without giving up rights, and without forced admissions of intent to evade U.S. income tax, that can come back to haunt.    Note, a Qualified Quiet Disclosure is very different from a "quiet disclosure," of which the IRS has promised a detection and punishment campaign.      Moreover, the Qualified Quiet Disclosure approach allows a taxpayer to operate outside the OVDP and to thereby, freely and fully, administratively and/or judicially contest the offshore penalties.   Through, an Administrative Agency Procedure Act before the District Court, for instance, an individual may contest the offshore penalty demand as it is applied by the IRS.

Conversely, if a taxpayer enters into the OVDP, he or she must agree to the penalties outlined in the program. The penalties and taxes imposed within the OVDP, are extremely expensive and punitive. For instance, a participant must pay a penalty of 27.5 percent based on the value of the undisclosed assets - as they are defined by the IRS.  In addition to the OVDP penalties, a participant must also pay the original tax, an additional 20 percent accuracy related penalty, failure to timely pay penalties of up to 25 percent of the income tax, and interest.  The taxpayer must also consent to re-open tax years which are already beyond the statute of limitations, thereby allowing the IRS to assess tax and penalties that the IRS otherwise would not be unable to do.    Thus, in many cases, participants are forfeiting assets, including entire lifetime savings and more to the government so that any income, inheritances, or gifts these people may receive in the future will belong to the IRS. 

To make matters worse, participants entering into the OVDP must waive Constitutional Protections against: self-incrimination (5th amendment), unreasonable search and seizure (4th amendment), and excessive fines (8th amendment).  This "Trifecta" of constitutional protections disappear once an individual enters into the OVDP disclosing: their names, social security numbers, undisclosed income, undisclosed assets, and the names of the advisors/3rd parties who facilitated the alleged "offshore tax evasion." Further, the government is not bound by transactional or use immunity for the participant participating in the Program.   For instance, numerous participants of the OVDP have been removed from the program and have been prosecuted with the government using (and the taxpayer being limited by) the very information provided by the taxpayer as part of the OVDP process.     Therefore, a taxpayer should be fully advised of OVDP advantages and disadvantages before deciding to make a disclosure because an OVDP begins first, with a waiver of constitutional rights, and then requires directly disclosing to the IRS criminal investigation division offshore transactions that could be (mis)construed as money laundering, wire fraud, mail fraud, tax evasion, or failing to disclose foreign financial accounts on an FBAR.  An example of such treatment is the Ty Warner matter.

In the case of Ty Warner (Beanie Bag founder, a former member of the Forbes 400 richest Americans, with a previous net worth of $2.6 billion) entered into the IRS OVDP only to be removed from the program for unknown reasons. The risk of entering into the OVDP for Ty Warner can be best understood in the settlement his attorneys reached with the IRS for the civil part of his case; his criminal case is still pending. Ty Warner failed to pay approximately $885,000 of taxes generated from undisclosed Swiss accounts. Even though Ty Warner failed to pay $885,000 taxes, the settlement agreement requires him to pay the government $53 million in taxes, penalties, and interest. This amounts to 60 times the original tax due. In addition, Ty Warner faces up to five years in a federal prison for tax evasion.  There have been a number of other individuals removed from the OVDP program and prosecuted, including most recently a 79 year old widow residing in Palm Beach because she did not report her inheritance of late husband’s foreign accounts.

On the other hand, even though the government has issued ominous threats to individuals who have not entered the OVDP (or previous, similar programs), since 2009, the government has not carried out this threat in any significant way.   For example: a taxpayer made a partial disclosure (i.e., not a Qualified Quiet Disclosure) to the IRS in which he omitted a secret Bermuda account on his amended tax returns.  Evidence suggests that individuals making Qualified Quiet Disclosures outside of OVDP have mostly fared better than individuals making disclosures through OVDP.  Those outside of OVDP, are assessed far less in taxes and penalties than individuals who have elected to make a disclosure through OVDP. In addition, these individuals have not waived their constitutional rights.

To sum it up, despite the fact that the IRS continues to threaten those who chose not to enter OVDP with prison sentences, monetary penalties, and more, those qualified to make a Qualified Quiet Disclosure have a far greater ability to contest IRS allegations of criminal and civil wrongdoing than the participants of the IRS OVDP. As of this date, individuals making disclosures outside the OVDP as a whole are far better off than their counterparts.

For a related article, "A Closer Look at the Non-Willful FBAR Penalty", California Tax Lawyer, Published by the State Bar of California, (Winter 2012).  

In accordance with Treasury Regulation Circular 230, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purposes of (i) avoiding tax related penalties under the Internal Revenue Code, or (ii.) promoting, marketing, or recommending to another party any tax related matter addressed herein.

 

Topics:  Compliance, Disclosure, Disclosure Requirements, FBAR, IRS, OVDP, Voluntary Disclosure

Published In: Criminal Law Updates, Finance & Banking Updates, International Trade Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Moskowitz LLP | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »