June 21, 2010
Noisy vs. Quiet Voluntary Disclosures
A Voluntary Disclosure Agreement (VDA,) is a program whereby taxpayers can receive certain benefits from disclosing prior period tax liabilities in accordance with a binding agreement. Voluntary Disclosure Agreements are offered to encourage companies not only to comply with federal and state tax laws, but in turn, generate revenue that may not have been available if the company did not come forward and disclose its liabilities. VDA programs are popular and are used very often.
Practitioners have often recommended two types of voluntary disclosure to their clients, each of which was designed to meet the IRS voluntary disclosure practice.
- A “noisy” disclosure is a form of disclosure whereby an attorney approaches the IRS Criminal Investigations Division (“CI”) on a taxpayer’s behalf to negotiate a waiver of prosecution prior to filing amended (or unfiled) income tax returns and the Foreign Bank and Financial Accounts (FBARs.)
- A “quiet” disclosure is a form of disclosure wherein a taxpayer, or his representative, directly files unfiled or amended income tax returns and FBAR reports with the IRS and Treasury without contacting the agency beforehand.
A voluntary disclosure must be truthful, timely and complete, and the taxpayer must demonstrate a willingness to cooperate (and, must in fact, cooperate) with the IRS in determining the correct tax liability. Good faith arrangements must be made by the taxpayer with the IRS to pay, in full, the tax, interest, and any related penalties. Voluntary disclosures are not available to all taxpayers, including those with illegal source income, but may be a viable option for the vast majority of taxpayers with unreported income or unreported foreign accounts.
The IRS recently announced that it would not afford VPD status to taxpayers who declined to enter the government’s special voluntary disclosure program (VDP) but instead, filed amended returns for unreported income from offshore accounts. Therefore, “quiet disclosures” would not leave affected taxpayers on terms equivalent to those who opted for “noisy disclosures”. There are no gray areas, you are either in the VDP or you’re not.
Taxpayers may now find that quiet disclosures could result in the worst possible outcome. This form of disclosure foregoes the VDP in hopes of flying under the radar. While the IRS ultimately receives an income tax payment, interest and penalties affiliated with the investor may still accumulate. It is clear, however, that those taxpayers who opted for a “quiet disclosure” shouldn’t expect criminal penalties and perhaps jail time will be waived, like those who were engaged in the VDP.
The VDP has been operating for decades, but the UBS AG scandal in early 2009 set its wheels in motion again. Many U.S. taxpayers feared the disclosure of their Swiss private bank account information to the IRS and were persuaded to come forward. In anticipation of a wave of voluntary disclosures, the IRS created a special temporary framework for the VDP and removed criminal penalties. Back taxes, interest, and civil penalties would have to be paid, but the taxpayer would expect there to be no jail time.
Over 15,000 taxpayers entered the VDP before the October 15, 2009 deadline. Not all taxpayers who attempted to participate in the VDP were accepted. Less than 3 percent of the applications had been expelled for reasons such as timeliness, completeness and truthfulness. The IRS estimates there are thousands more that have ignored the program and remain offshore.
Although practitioners had once recommended both “noisy” and “quiet” disclosures, the recommended form of disclosure is clear. “Quiet” disclosures represent an awkward halfway approach to the offshore dilemma.
If you or your company are in a situation that will require a disclosure, such as ownership of a Swiss account, contact your MarcumRachlin tax advisor.