— U.S. Citizen Abroad (@USCitizenAbroad) June 13, 2013
— U.S. Citizen Abroad (@USCitizenAbroad) June 14, 2013
The second tweet references a very interesting post by Roy Berg.
What’s the big deal?
What is a “quiet disclosure”?
The format of Mr. Berg’s excellent post invites the the question of what is a “quiet disclosure”? As Mr. Berg acknowledges the term is not defined. He notes that:
While the term quiet disclosure is not a defined term, it is generally understood to mean when a taxpayer: a) files late or amended tax returns outside of the Voluntary Disclosure programs; or b) ignores past tax filing delinquencies and simply becomes compliant prospectively.
To define “quiet disclosure” in this manner is to define a “quiet disclosure” as being any attempt to comply with one’s tax and FBAR obligations without using one or more of the voluntary disclosure programs.
To put it another way:
Any attempt to redress past mistakes that does NOT include a direct invitation to the IRS to assess penalties (yes that would include streamlined compliance) is a “quiet disclosure”.
Can this really be the intent of the IRS? As bad as they may be, I doubt it.
How should “quiet disclosure” be interpreted?
Nobody nows for sure. Most (if not all) of the discussion of “quiet disclosures” is in the context of OVDP. The FAQs say that “quiet disclosures” are frowned upon. But remember, this is in the context of a discussion about OVDP.
To put it simply:
Although OVDP has been used by many, it was intended for criminals.
Now it may be reasonable, that no tax evader outside OVDP should be allowed to get a better deal than tax evaders who use OVDP. (This point is made by Mr. Berg.)
This issue was raised just this week in a post at Forbes about voluntary disclosure by Charles Rettig (an OVDP) lawyer. The post suggests that people should solve their tax problems be entering OVDP. Predictably this suggestion generated a number of comments from U.S. citizens abroad. The following comment included a rationale for why it is wrong to presume that all filings outside the voluntary disclosure programs constituted “quiet disclosures”. Like Mr. Berg, Mr. Rettig references the GAO report. He appears to presume that filings outside OVDP constitute the kind of “quiet disclosure” that the GAO report contemplates and condems.
One comment to the Rettig article was:
The GAO Report that you cite begins with the following title:
“OFFSHORE TAX EVASION:
IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion
GAO-13-318, Mar 27, 2013″
Your first clue should be the word “EVASION”
and includes in very third paragraph:
“IRS has detected some taxpayers with previously undisclosed offshore accounts ATTEMPTING to circumvent paying the taxes, interest, and penalties that would otherwise be owed, but based on GAO reviews of IRS data, IRS may be missing attempts by other taxpayers attempting to do so.”
Your second clue (especially as a criminal lawyer) should be the words “ATTEMPTING TO CIRCUMVENT”.
The title of the report and the above sentence provide the context for the GAO report which is this:
1. If you are a person who should have been in the OVDP (meaning you are a criminal); and
2. You try to avoid detection of your criminal activity by quietly trying to sneak your returns into the system – then you should be punished.
Your article, whether by accident or design, creates the impression that any person with an offshore account, who did not file FBARs and happens to owe some tax, should be entering OVDP. Not only is this irresponsible and offensive “fear mongering”, but it ignores the following simple facts as they pertain to the 6 million Americans Living Abroad, (who you conveniently exclude from your discussion):
A. Remember the December 2011 FS – Message: File your stuff returns and FBARs!
B. Remember the new (2012) Streamlined Disclosure for Americans Abroad
C. Remember that the law requires US persons to file tax returns and FBARs and does NOT require entering OVDP.
Don’t see anything there that even suggests that honest Americans abroad who were unaware of all the ridiculous requirements should be entering OVDP.
Your reasoning seems to be:
All criminals use foreign bank accounts, hence all people who use foreign bank accounts are criminals
Do you really believe that U.S. citizens residing outside the U.S. are using bank accounts in their country of residence for tax evasion? Contrary to the view of people in the United States, foreign bank accounts are NOT presumptively vehicles of tax evasion.
Articles like this have become part of the problem because they make honest taxpayers fearful of complying with law. Or is it that, in the United States of today, all taxpayers are presumed to be criminals?
If there is a definition of “quiet disclosure” nobody knows what is is. But, let’s dig a bit deeper. When did the concept of “quiet disclosure” arise? It appears to be in conjunction with a discussion about OVDP. The earliest reference I can find to a “quiet disclosure” seems to be by Phil Hodgen where he describes what takes place at an ABA OVDP compliance meeting. The point is again that:
The discouraging of “quiet disclosures” is in the context of OVDP.
Although OVDP was used by many, it was designed for criminals.
For the reasons given in this post I suggest that the language from the GAO should be interpreted to mean that:
A “quiet disclosure” is a failure to use OVDP as the compliance mechanism if you were the type of criminal that OVDP was designed for.
What should tax lawyers/practitioners advise?
Mr. Berg raises the question of whether advising a “quiet disclosure” could be a Circular 230 violation. Circular 230 includes the rules of practice before the IRS. Tax practitioners appearing before the IRS are bound by them. What is their possible relevance to the issue of voluntary disclosure?
Mr. Berg notes that:
Further, some practitioners have noted that advising a client to participate in a quiet disclosure may be a violation of section 10.51(4) of Circular 2307 and thereby subject the practitioner to professional sanction by the IRS’s Office of Professional Responsibility.
Section 10.51(4) of Circular 230 precludes practitioners from engaging in conduct that “in any way gives false or misleading information” to the IRS. Admittedly, it might require a stretch of logic to find an ethical violation when the Code clearly allows filing late or amended returns. However, it is not inconceivable that the IRS would, given the right facts, seek to pillory a practitioner for advocating quiet disclosure when it has such a clear policy against such.
Assuming this perspective is valid, it raises the question of:
To whom does the lawyer owe the duty? To the IRS or to the client? I hope the duty is owed to the client.
There are tax lawyers who are presumptively advising clients to enter OVDP. That’s exactly why so many innocent U.S. citizens abroad were trapped in OVDP.
How could a U.S. citizen abroad who:
A. was using his bank accounts to live his life, and;
B. NOT as a sacred instrument of tax evasion
possibly be what the creators of OVDP had in mind?
To be clear the IRS will NEVER say no to your penalties. But, that doesn’t mean they will actively seek them either.
I raised the Circular 230 issue in a post called: The Conscience of A Lawyer and the FBAR Fundraiser. With commentary on the GAO Report providing encouragement for lawyers recommending entering OVDP, it might be a good idea to revisit this issue.
In closing, the following comment by Todundsteur seems relevant here:
Note that in the “John and Mary” example he provides (invents?) there is nothing to indicate that anything bad actually happened to either John or Mary as a result of their quiet disclosure.
He says that a quiet disclosure is tantamount to a confession of tax evasion. That is false.
A quiet disclosure is nothing more than an admission of error.
Error does not equate to fraud or criminal intent.
In contrast, applying for entry into the OVDI with its promise of protection against criminal prosecution IS an admission or at least strongly indicative of past criminal intent.
In my view, a lawyer whose client has not privately confessed past criminal conduct with regard to tax or FBAR filing obligations and yet encourages that client to “surrender” themselves to the IRS CID by applying to enter OVDI has committed an egregious ethical violation. It is no different from a criminal defense counsel whose client insists on his innocence and yet nevertheless encourages that client to plead guilty and coaches them on how to get through the “providency inquiry” so that the judge will accept his plea.
The IRS has long encouraged quiet disclosure in every other tax related context and will continue to do so for the very good reason that it enhances revenue and future voluntary compliance at little or no cost to the United States.
The FAQ accompanying the original (2009) OVDI that attempted to dissuade quiet disclosure in the context of OVDI by claiming that the IRS would closely scrutinize amended returns was probably a deliberate lie intended to enhance the short-term headline revenue number. In fairness to the IRS they appear to have had no inkling of the vast number of criminally innocent persons who were in technical violation of the foreign account reporting requirements.
It obviously became apparent to the Service that too many of the IRS’s accomplices in the tax bar were indiscriminately funneling everyone and their cousin into OVDI to line their own pockets and that most did not belong there.
It is equally obvious that the IRS now realizes that its short-term greed for headlines was endangering its carefully nurtured long-term program of encouraging quiet disclosure. and they have been rapidly back-pedaling from their original FAQ ever since.
The recent GAO report which criticized the IRS failure to agressively pursue quiet disclosers is a sad commentary on the technical ignorance and moral depravity of the Democratically Elected Representatives of the American People. Blackmail is apparently something that Congresspersons are familiar and morally comfortable using as an “enhanced revenue technique” in the same way they generally approve of waterboarding as an enhanced interrogation technique.
The IRS, bless its collective pea-picking heart, knows better.
The question is will they be able to withstand the GAO’s pressure for short-term rewards at the expense of long-term trust and the revenues that come with it?
Thanks to Mr. Berg for raising a very difficult issue. Would very much welcome his further comments and others faced with difficult job of advising clients in a FATCAesque world.