OVDI: Knowing When to Quietly Disclose vs Opting Out
Aug 31, 2017
This FBAR Wiz post will explore, in the context of the OVDI program, when to quietly disclose, versus when to opt out of OVDI. In years past, the IRS has been lenient with taxpayers that file FBARs and other tax returns past the due dates through what is known as "quiet disclosures," which essentially entails not using the offshore voluntary disclosure program ("OVDI/OVDP") to become compliant. Often, these taxpayers believed that their circumstances warranted the general “reasonable cause” provision and reduced FBAR penalties or even a warning letter, which are not available through OVDP. Still, others were trying to sneak in the delinquent FBARs in the hopes of the IRS not discovering the tardiness of the filings so they wouldn’t have to worry about any penalties at all. Not many considered entering the voluntary disclosure program, then opting-out of OVDI/OVDP, commonly referred to as a qualified quiet disclosure . Over the past several years, the IRS has made an attempt to expand upon the process by which holders of foreign-held bank accounts are required to bring forth unpaid taxes and penalties in order to avoid criminal charges and further punitive penalties. This compliance attempt is summed up in OVDI or the Offshore Voluntary Disclosure Initiative. Quiet Disclosure As the IRS attempts to streamline measures and begins to employ sophisticated data-tracking and -collecting tools, quiet disclosures seem to be going to the wayside. While a formal definition does not exist, a quiet disclosure typically refers to an attempt by a taxpayer to file or amend previous years’ tax returns and FBARs without alerting the IRS to any intricacies and circumstances. So no formal compliance program is used with a quiet disclosure. Remember that you can quickly and anonymously check if you have an obligation to file the FBAR form and/or the Form 8938 by using the free FBAR Wiz app (link). Just click "launch the app" above to get started with the FBAR Wiz and be proactive. In this way, the assessments of penalties would not adhere to statutory laws and instead are left to the IRS agent’s discretion. In some cases penalties may not be imposed at all, however, the IRS may also bring severe FBAR penalties and even criminal charges if it so chooses. Therefore, even though the decision is entirely yours on whether or not to enter the OVDI, the uncertainty and risk associated with quiet disclosures are seen as the less attractive option. Doing a quiet disclosure is essentially rolling the dice to see what happens: will the IRS fine your heavily or will your quiet disclosure go unnoticed: there are no concrete assurances here. It is important to note that a quiet disclosure, in any form, is not an IRS-approved measure to get things right with regards to your undisclosed foreign accounts. For those who choose not to disclose through the OVDI, they put themselves at risk for criminal prosecution. To Opt Out or Not? In contrast to a quiet disclosure, participation in the OVDI program guarantees that, if accepted into the program, you will not be subjected to criminal prosecution, and provides all program participants a statutory penalty structure. Therefore, IRS agents who work in this area must adhere to the penalties as laid out by the program's regulations and have neither the authority nor the ability to use their personal discretion when reviewing cases for applications of specific fines. This is a good thing, as it lets you predict the amount of penalties that you will pay if you go this route. Whereas, a quiet disclosure could range from no penalties to steep ones. Once the OVDI process is complete, a closing agreement will be sent to you for signing. At this point, you may choose to sign the document and accept the penalties imposed or you may choose to opt out. Specifically, you are not opting out of the entire OVDI program, rather, you are opting out of the penalty structure, while still not exposing yourself to the risk of criminal charges. Next, you can request a waiver or reduction of the penalties because of particular circumstances that warrant consideration - reasonable cause is one such example. Because the IRS offshore disclosure laws are particularly complex, consulting with a tax attorney is a prudent decision. Whether you are already in the OVDI process or still considering it, consulting with a CPA or attorney is definitely the way to go.