What are the risks of an IRS quiet disclosure? Is there a formal IRS process known as a "quiet disclosure," and does the IRS honor this strategy for amended tax returns?

There is reason to be concerned about the growing number of clients with genuine issues with unreported income (especially when it involves unreported offshore income and FBAR requirements) who wish to discuss a "quiet disclosure."

It is important from the outset to establish that the IRS doesn't have any authorized program or recognized procedure for what is commonly called a quiet disclosure. The IRS has often and substantially addressed the issue, warning that US taxpayers who submit an amended return without a disclosure such as the Offshore Voluntary Disclosure Program" retain the risk of harsh and substantive penalties and interest at a minimum, as well as the potential for criminal prosecution for tax evasion.

A quiet disclosure occurs when a US taxpayer amends a prior year’s return(s) and submits the amended product without going through the a "voluntary disclosure" or the "Streamlined Filing Compliance Procedures," often simply referred to as the "streamlined procedures."

A US taxpayer must be aware of the risks of an IRS quiet disclosure and weigh the disadvantages and risks they are assuming against the potential savings they hope to achieve. This is especially true in light of recent advances in the IRS' Artificial Intelligence (AI) program. One of the realities a taxpayer would consider in these situations was the substantial lack of resources at the IRS to review every submitted or amended return in search of potential violations.

AI allows the IRS to "set it and forget it" - establish the algorithm or pattern of behavior the agency wishes to identify within the vast data of submitted returns and electronic offshore submissions from foreign financial institutions and allow AI to scan for potential audit targets.

The first question, therefore, is "What is your appetite for becoming a potential IRS audit target?" The likelihood that AI will identify the patterns of undisclosed or under-reported income within your quiet disclosure is substantially higher. The IRS will likely view this type of behavior as a form of tax evasion and apply serious financial penalties and interest while considering criminal tax evasion charges.

A quiet disclosure accomplishes nothing in terms of immunities, reduced penalties or release from criminal prosecution provided by a voluntary disclosure or streamlined procedure.

The only potential advantages of a quiet disclosure are the small chance that the changes will go unnoticed by the agency and the fact that preparing an amended return is less expensive than the costs and time associated with participation in one of the more formal IRS disclosure programs.

Unfortunately, many "tax professionals" offer what may be described as a "qualified quiet disclosure." There is no such program under the US tax code, and one might need to re-read the IRS warning above regarding harsh penalties and potential jail time. In this scenario, the "tax professional" advises the client something akin to "based on my extensive experience and knowledge, you qualify for a quiet disclosure program that avoids penalties or prosecution due to non-willful intent or behavior." This is followed by a quiet disclosure (amended returns) and perhaps a letter explaining some set of circumstances and a request for the IRS to waive penalties and/or prosecution.

These same "tax professionals" may also suggest similar behavior under the guise of opting-out of some or all of the penalties and a written request for reduced penalties (or an outright waiver) after filing for the voluntary disclosure program.

There are occasions when it is the right decision to amend and submit an updated tax return. If this strategy involves substantial unreported or under-reported income or offshore accounts and income, you need the advice and counsel of an experienced tax attorney. A CPA, tax preparer or "tax professional" cannot provide the protections of the "attorney-client privilege" that exist in specific discussions or correspondence between a tax attorney and their client.

If you have substantial unreported or under-reported income or undisclosed offshore accounts and assets, you need to face the changed realities of AI and significantly updated computer systems at the IRS and have a candid conversation with a tax attorney. The risks of an IRS quiet disclosure are too significant to undertake without the genuine insight and counsel of a tax attorney with domestic and international tax experience.