Now that the 2011 OVDI is over, people have been asking: "What do I do now?, "How do I file delinquent FBARs?", etc... This is a bit of a tricky question. Currently, there the most common ways to report undisclosed foreign income and bank accounts are a quiet disclosure, or a voluntary disclosure. There are problems with each method and the decision should not be taken lightly.
I recently spoke with an IRS agent about the post OVDI voluntary disclosure and the process is as follows. The voluntary disclosure process is similar to the OVDI, but the penalty range is different (5-50%) and process is slightly more involved. The process starts with a phone call to your local IRS criminal investigations office and, after that, pretty much follows the 2011 OVDI. The IRS is requesting amended returns, including any previously excluded foreign income and corrected FBARs (Form TD F 90-22.1) for the previous six years, a conference (interview) with the taxpayer, and the 2011 OVDI letter.
The other option is a quiet disclosure. To make a quiet disclosure, the taxpayer files amended tax returns, if he has excluded foreign income, and files FBARs for the previous 6 years. Unlike the voluntary disclosure process, the taxpayer does not alert the IRS that he will be filing the returns and FBARs. Penalties likely will be applied for late filing, and in my professional opinion, the chances of an audit are pretty high.
The problem with the voluntary disclosure process is that a taxpayer is guaranteed penalties but, for for going through the voluntary process, he is less likely to face criminal charges. The IRS claims that if you go through the voluntary disclosure process, they will not recommend criminal penalties if the money came from legal sources. The IRS is actively encouraging people to come forward through this method.
Currently, the IRS is aggressively pursuing anything related to unreported foreign income and bank accounts and this makes the voluntary disclosure look like a better option. In my conversation with the IRS agent implied that people will come under increased scrutiny if they make a quiet disclosure and they are selected for an examination. This means the possibility of criminal charges, and a certain attempt by the examining agent to impose willfulness penalties for failing to file the FBAR. However, there might be a few limited situations where this is the better option.
If you have any questions please contact me directly or leave a comment.
As with everything related to the IRS, it is difficult to provide comprehensive information related to taxes and tax law on the web. Please do not rely on this article without consulting your tax professional.