IRS OVDI – Quiet v. Voluntary Disclosure

In some cases, a taxpayer who has previously unreported foreign income may decide to amend their tax returns in order to avoid some of the harsh penalties involved with non-disclosure rules.  They also pay any past due penalties and interest that has accrued based on this new unreported income.  However, they do not directly notify the IRS that the reason they are amending their taxes is due to foreign income they have now decided to disclose.  Such disclosure is known as “quiet disclosure”.   By “quietly” implementing these changes in previous years’ tax returns, the taxpayer is hoping that making such changes will allow them to become compliant with any taxes they may owe on previously undisclosed foreign income, and they can avoid any potential issues with the IRS.

Although quiet disclosure have been popular in the past, the IRS has recently made changes to encourage more voluntary disclosures.  Voluntary disclosures are defined as:

a. the taxpayer showing a willingness to cooperate (and does in fact cooperate) with the IRS in determining his or her correct tax liability; and

b. the taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable (IRS, 2014)

The Voluntary Disclosure Program that started in 2009 made it a matter of internal practice for the IRS to encourage voluntary disclosure. Unlike quiet disclosures, voluntary disclosures involve active communication by a taxpayer with the IRS in reporting undisclosed income.  By doing so, although not guaranteed, the IRS is much less likely to impose some of the harsher non-disclosure penalties.

Although quiet disclosure of previously unreported income may be admirable, it does not reduce the chances of criminal and civil prosecution based on non-disclosure of foreign income.  In fact, in some cases, it can actually increase the risk as IRS agents are actively looking out for those who are opting for quiet disclosures by amending their taxes for several years in order to disclose previously unreported income.  Those taxpayers that have chosen quiet disclosure should be aware that they still can face the same penalties that would occur even if they had not eventually disclosed this income.

In order to avoid such penalties, if you have been practicing quiet disclosure in the past, the best option is to actively begin voluntary disclosure of any your foreign income sources.  By doing so, you can dramatically reduce your potential in paying both significant fines and in some cases, criminal prosecution.  If you need assistance in participating in the voluntary disclosure program, working with a tax professional who is familiar with the program is going to be your best option.

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Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.

Bibliography

IRS. (2014, February 24). Revised IRS Voluntary Disclosure Practice. Retrieved from Internal Revenue Service: https://www.irs.gov/compliance/criminal-investigation/irs-criminal-investigation-voluntary-disclosure-practice