THE PROCESSES FOR FIXING THE PROBLEM
The first step, in deciding what option is the best for your situation is to educate yourself with regard to the options. The second step is to engage an attorney seasoned in dealing with these issues. An accountant will most likely be a necessary part of your team, but you should engage legal counsel first. In turn, your attorney will engage the accountant. Under the case of U.S. v. Kovel, it was held that the accountant’s work product received attorney/client privilege and could not be used as evidence when it was the attorney, not the client, who engaged the accountant to prepare the amended returns as opposed to the client.[1]
QUIET DISCLOSURE
To make a quiet disclosure, a taxpayer must file amended income tax returns and FBARs going back as long as the statute of limitations which is between 5 and 6 years. In a quiet disclosure, a tax payer is not coming forward under the OVDP. This avoids the penalties, although reduced, imposed under that program, but leaves possible criminal prosecution on the table. A taxpayer merely amends his or her returns to bring them into compliance with the tax code, and pays the back tax, penalty, and interest. They also complete the FBARs. Previously this was an awesome tactic. However, with the greater level of scrutiny that has recently been applied, taxpayers who amend and file delinquent FBARs are being targeted. Although they do tend to fare better in the penalty calculation than those who took no action.
The General Office of Accounting reports that quiet disclosures have been extensive. The GAO has cited that from 2003 until 2008, 10,595 taxpayers have made quiet disclosures.[2] Of the quiet disclosures, the GAO cites 3,386 taxpayers made late or amended filings for multiple tax years. Of those filers, 94 made them for the complete 6 years statute of limitations period. While the IRS disputes the findings, the GAO recommends that the IRS begin to examine these amended returns to better detect quiet disclosures and impose penalties when warranted.
NEW DISCLOSURES
Another tactic currently being utilized is the “new disclosure” approach. Under this approach the taxpayer simply discloses the foreign account for the first time on their current return. The hope is not to be discovered for the previous year’s returns. Many new disclosure taxpayers have enjoyed the same success as taxpayers under quiet disclosure. However, the GAO is on to this tactic also.[3] The number of taxpayers checking the box on Schedule B section III, which indicates the existence of a foreign account has more than doubled between 2003 and 2010. The new number is 514,635 per year. The GAO also reports that the number of FBARs has more than tripled in the time frame 2003 and 2011. Also, they site that it has doubled between 2009 and 2010.
There is a problem with a quiet disclosure and new disclosure: the IRS teamed with the Department of Justice is making an effort to look more closely at first-time FBAR filers. It can be expected that there will be a much higher level of audit activity for both first time filers and individuals filing an amended return to exposes foreign accounts.
[1] United States v. Kovel, 296 F.2d 918 (2d Cir 1961)
[2] Offshore Tax Evasion: IRS Has Collected Billions of Dollars, but May Be Missing Continued Evasion (GAO-13-318). https://www.gao.gov/assets/660/653369.pdf
[3] Id.