In a recent report, the General Accounting Office (GAO) encourages the IRS to do more to uncover and pursue taxpayers who made quiet disclosures in regard to their non-U.S. accounts.
In recent years, the IRS has encouraged taxpayers with non-U.S. accounts and non-U.S. entities to enter into its Offshore Voluntary Disclosure Initiative programs if they had previously not reported the income from and/or the existence of those accounts and entities. When applicable, the OVDI programs avoid criminal exposure for the prior nonreporting. It also reduces the penalty exposure of the taxpayer, although significant penalties (based on the highest balance or value of the offshore accounts or assets) can still apply. The OVDI programs also provide a method of filing disclosure returns without penalty if all income taxes relating to income from the reportable assets had been properly paid when due.
In lieu of entering an OVDI program or otherwise filing in accordance with the program, some taxpayers have opted to file amended or initial returns for prior years reporting their non-U.S. accounts and companies. Such so-called "quiet disclosures" were often undertaken to attempt to correct the prior reporting deficiencies in this new era of enhanced enforcement activity, while avoiding having to pay the OVDI program penalties. Undoubtedly, many such taxpayers sought to fly under the radar - they would correct their prior underreporting but hopefully not be examined and thus avoid reporting penalties.
The GAO report notes that there are substantially more amended filings for prior years that likely relate to offshore reporting than people entering into the OVDI program. Thus, the GAO suspects there are a large number of taxpayers who made quiet disclosures.
The report also notes that the IRS has already reviewed at least several thousand amended returns based on its criteria to find suspect filings, and had found several hundred quiet disclosures. The report notes that:
An IRS official told us that the tax returns that were identified as part of a quiet disclosure will be examined and that cases already examined had penalties assessed. Because they were quiet disclosures, the official said the taxpayers did not receive the reduced offshore penalty.
The IRS offshore initiative office did indicate to the GAO that it had no current plans to conduct efforts as to uncovering quiet disclosures. The GAO report encourages the IRS to do some further research, employing some of the research methodologies used by the GAO to uncover more quiet disclosures.
The GAO also encouraged the IRS to conduct further efforts to determine the extent that taxpayers that are making their first time foreign reporting may have underreported non-U.S. accounts in prior years which they are not reporting currently. Unlike taxpayers who make a quiet disclosure and thus correct prior filing deficiencies, the GAO is concerned that some taxpayers who are making first time disclosures may have had their accounts in prior years but are only now starting to report - there is a good chance that such taxpayers may have unpaid taxes, interest and penalties relating to prior years. The GAO advises that the IRS can easily find suspect situations simply by asking when the newly reported filers opened the accounts they are now starting to report.
In summary, the GAO report advises us that the IRS has undertaken some reviews to uncover and audit taxpayers who made quiet disclosures. While not presently doing further research in this area, based on GAO prompting, further IRS research may be undertaken in this regard. Further, the report may stir greater IRS interest in reviewing the circumstances of first-time disclosures to determine if prior tax obligations may have been avoided.
GAO Report to Congressional Requesters (March 2013), OFFSHORE TAX EVASION: IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion