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 an audit, 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, cryptocurrency or NFTs, 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.
We invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.