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“Quiet Disclosures” – Is the Jig Up?



iStock_tax evasionXSmallCertain findings and recommendations by the Government Accountability Office (GAO) about offshore tax evasion and the IRS efforts to combat it have many taxpayers worried. The GAO is an independent, nonpartisan agency that works for Congress and is often referred to as the “congressional watchdog.” It investigates how the federal government spends taxpayer dollars and makes recommendations as to how a governmental agency can be more efficient and effective.

Recently issued GAO report, Offshore Tax Evasion: IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion, provides key information about the IRS’ offshore voluntary disclosure initiatives. More importantly, however, GAO indicates its review of IRS data shows that the IRS is missing what appear to be rampant “quiet disclosure” and “new account” filings.

“Quiet Disclosures” / “New Account” Filings

With a “quiet disclosure”, taxpayers quietly amend past tax returns and FBARs reporting previously unreported income and accounts. With “new account” filings, taxpayers report the existence of any offshore accounts as well as income from the accounts on the current year tax return, without amending any prior years’ returns. They often also disclose the existence of the accounts by filing FBARs for the current calendar year making it appear as if the account was just newly opened.

GAO takes the IRS to task for not finding enough “quiet disclosures” and “new account” filings which lose billions of tax and penalty dollars and can undermine the effectiveness of the offshore voluntary disclosure programs.

The report states:

IRS has detected some taxpayers with previously undisclosed offshore accounts attempting to circumvent paying the taxes, interest, and penalties that would otherwise be owed, but based on GAO reviews of IRS data, IRS may be missing attempts by other taxpayers attempting to do so. GAO analyzed amended returns filed for tax year 2003 through tax year 2008, matched them to other information available to IRS about taxpayers’ possible offshore activities, and found many more potential quiet disclosures than IRS detected. Moreover, IRS has not researched whether sharp increases in taxpayers reporting offshore accounts for the first time is due to efforts to circumvent monies owed, thereby missing opportunities to help ensure compliance. From tax year 2007 through tax year 2010, IRS estimates that the number of taxpayers reporting foreign accounts nearly doubled to 516,000. Taxpayer attempts to circumvent taxes, interest, and penalties by not participating in an offshore program, but instead simply amending past returns or reporting on current returns previously unreported offshore accounts, result in lost revenues and undermine the programs’ effectiveness.

In the Money

The offshore voluntary disclosure fixed penalty is currently 27.5% of the highest aggregate value of all offshore accounts (and value of foreign assets that in any way related to tax noncompliance – think purchase of an apartment in Dubai with unreported income). In addition, participation in the offshore voluntary disclosure program requires payment of other penalties such as the 25% failure to file penalty and / or the 20% accuracy-related penalty. Losing out on these amounts to undetected “quiet disclosures” means the IRS is losing billions of dollars in potential penalties.

In the case of a “new account” filing, a taxpayer slipping under the wire would avoid paying any delinquent taxes, interest, or penalties, unless audited.

Even though those who are caught disclosing offshore accounts outside of one of IRS’s offshore voluntary disclosure programs risk steeper penalties and criminal prosecution, based on the particular facts and circumstances of the case, GAO wants more. GAO wants the exits plugged and wants those filing quietly or on a “prospective basis only” to be caught.

GAO Tells IRS What To Do

GAO’s recommendations to the IRS include the mundane such as further education to the public about their reporting duties with respect to offshore assets. Of importance to those wondering about making a “quiet disclosure” or complying on a “prospective basis only”, GAO has told the IRS it should:

•  Explore options for employing a methodology for identifying and pursuing potential quiet disclosures to provide more assurance that actual quiet disclosures are not being missed and then implement the best option.
•  Conduct an analysis designed to measure the extent that taxpayers are reporting existing foreign accounts on the Form 1040, Schedule B or on FBARs for the “first time” and catch these taxpayers who are trying to circumvent taxes, interest, and penalties that would otherwise be owed.

The fact that GAO has told the IRS to examine the Schedule B is significant. The Schedule has the taxpayer check a box whether he has a foreign account. If it is being checked “yes” for the first time, but the taxpayer has lived and worked abroad for many years (as determined by prior tax filings) this will surely raise eyebrows. Information can also be cross-checked on Form 8938 regarding whether the asset being reported was acquired or closed in the current tax year.

The IRS agreed to all of the GAO recommendations. This could portend a rise in the number of audits and deeper investigations in the offshore area. Only the future will tell.

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Virginia La Torre Jeker J.D., has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has 30 years of experience specializing in US and international tax planning as well as international commercial transactions. She has been based in Dubai since 2001; prior to that time she worked in Hong Kong for 15 years as a US tax consultant for international law firms, major banks (including HSBC) international accounting firms (Deloitte) and trust companies. Early in her career she worked in New York with the top-tier international law firm, Willkie Farr & Gallagher.

Virginia is regularly asked to speak at numerous conferences and seminars for various institutes and commercial organizations; publishes a vast array of scholarly works in her area of expertise, been interviewed by CNN and is regularly quoted (or has her articles featured) in local and international publications. She was recently appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland. She was a guest lecturer at the University of Hong Kong, LL.M Program (Law Department) and served as an adjunct Business Law professor at the American University of Dubai and at the American University of Sharjah where she also taught the legal / ethical aspects of internet law and internet based transactions.

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