On April 26, 2013 the US Government Accountability Office released a report1 (“the Report”) that
encouraged the Internal Revenue Service (“IRS”) to seek out off-shore filers who have circumvented the
IRS’s recent Voluntary Disclosure programs2 in favor of “quiet disclosure.” 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.
The IRS has agreed with the Report’s recommendations and, as a result, those taxpayers who have or
plan to engage in quiet disclosure likely face significantly increased risk of IRS examination. While typical
IRS processes for collecting penalties occur in an orderly and measured fashion, the draconian penalties
that can apply for failing to file timely returns are not eligible for these procedural niceties. As a result, the
taxpayer can find himself in the position of owing tens of thousands of dollars of penalties after receiving
only a single letter from the IRS.
Most of the penalties for failing to file a timely tax return are subject to the statutory defense of
“reasonable cause.” In other words, if the taxpayer had “reasonable cause” for not filing on time, the
penalties can be eliminated entirely. However once a penalty has been assessed, the taxpayer may
argue “reasonable cause” only after taking the following steps: first, paying the penalty in full; second,
filing a claim of refund and, if denied; third suing in Federal Court. The US Taxpayer Advocate Nina
Olson was correct when she said “Bad things happen to people who ignore IRS correspondence.”3
IRS views quiet disclosures with suspicion
Rightly or wrongly the Report and the IRS view skeptically those who make quiet disclosures. This
skepticism is based on three factors: first, those taxpayers who make quiet disclosures circumvent the
Voluntary Disclosure programs and this undermines the incentives to participate in those programs.
Second, the taxpayers who are able to circumvent the Voluntary Disclosure programs pay fewer
penalties than participants, which results in lost revenue for the US Treasury.4 Third, it is antithetical to
principles of fairness that those who do not follow the rules (by using quiet disclosures) may receive
more favorable treatment than those who do follow the rules.
For practitioners with experience in this area, the IRS’s disdain for quiet disclosure is not news. The
2012 OVDP frequently asked questions include the following two admonitions:
"Taxpayers are strongly encouraged to come forward under the OVDP to make timely, accurate,
and complete disclosures. Those taxpayers making “quiet” disclosures should be aware of the
risk of being examined and potentially criminally prosecuted for all applicable years.5
The IRS is reviewing amended returns and could select any amended return for examination.
The IRS has identified, and will continue to identify, amended tax returns reporting increases in
income. The IRS will closely review these returns to determine whether enforcement action is
appropriate. If a return is selected for examination, the 27.5 percent offshore penalty would not
be available. When criminal behavior is evident and the disclosure does not meet the
requirements of a voluntary disclosure under IRM 9.5.11.9, the IRS may recommend criminal
prosecution to the Department of Justice."6
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.
Quiet disclosures likely face increased risk of examination
The Report made several recommendations to the IRS to identify those using quiet disclosure: first, the
IRS should: a) “explore options for employing a methodology to more effectively detect and pursue quiet
disclosures and implement the best option;” and b) “analyze first-time offshore account reporting trends
to identify possible attempts to circumvent monies owed and take action to help ensure compliance.”8
Acting IRS Commissioner Steven Miller agreed with the recommendations set forth in the Report and, in
comments attached to the Report, stated “appropriate action will be taken including examinations, if
warranted.”9
Using the methodology described below, the Report identified 10,595 potential quiet disclosures, which
was much higher than the potential quiet disclosures identified by the IRS.10
The Report identified these potential quiet disclosures by looking at taxpayers who, for the tax years
covered by the 2009 OVDP (2003 – 2008): a) filed amended or late returns; and b) filed amended or late
FBARs.11 The Report does not appear to have included taxpayers who have recently filed FBARS and
indicated on Schedule B of the form 1040 that they possess a foreign bank account, though the Report
indicates that this combination of factors might indicate a quiet disclosure.
Conclusion
The IRS went on record way back in 2009 that it did not approve of quiet disclosures. With the release of
the Government Accountability Office report it is clear that other branches of the federal government
share this disdain. It remains to be seen what steps the IRS will take to catch taxpayers who have
engaged in quiet disclosures and the vigor with which it will pursue them. Because the failure to file
penalties can be assessed with very little notice to the taxpayer, it is important for those who made quiet
disclosures to closely watch their mail box and respond to any IRS correspondence immediately. As Ms.
Olson said “Bad things happen to people who ignore IRS correspondence.”
1. Offshore Tax Evasion: IRS Has Collected Billions of Dollars, but May Be Missing Continued Evasion, GAO-13-318, March 27, 2013.
http://www.gao.gov/assets/660/653369.pdf.
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2. i.e., 2009 Offshore Voluntary Disclosure Procedure (“2009 OVDP”); 2011 Offshore Voluntary Disclosure Initiative (“2011 OVDI”); 2012
Offshore Voluntary Disclosure Program (“2012 OVDP”).
3. National Taxpayer Advocate Nina is credited with this quote. See, Yablon, “101 Tax Quotes for Tax Day,” Tax Notes, April 15, 2013, p. 323 at
324. The quote is substantially similar to the first sentence in Chief Justice Roberts’s opinion in Hink v. U.S., 99 AFTR 2d 2007-2814 (127 S. Ct.
2011) in which he stated: “Bad things happen if you fail to pay federal income taxes when due.”
4. Supra note 2 at p. 23.
5. 2012 OVDP FAQ 15
6. Id. At FAQ 16
7. Mopsick, “Tax Justice for Americans Abroad” Tax Notes, July 9, 2012, p. 189 at 191.
8. Supra, note 2 at p. 29.
9. Id., at p. 61.
10. Supra, note 2 at p. 24.
11. Id. at p. 25.