Why an FBAR Quiet Disclosure Is a High-Risk Strategy

A U.S. person’s obligation to report foreign financial accounts is fulfilled by filing a Report of Foreign Bank and Financial Accounts (FBAR) with the Financial Crimes Enforcement Network (FinCEN). The FBAR is not a tax form but an informational report used to combat tax evasion. When a taxpayer realizes they have failed to meet this filing obligation, they may consider various methods to correct the oversight.

One such method is the “quiet disclosure.” This is an unofficial approach where a taxpayer rectifies past non-compliance without formally alerting the Internal Revenue Service (IRS) through an established program. It involves filing delinquent FBARs and amended tax returns without any accompanying explanation, hoping the filings will be processed without attracting scrutiny and potential penalties.

The Mechanics of a Quiet Disclosure

A quiet disclosure involves two actions to rectify filing deficiencies without engaging formal IRS channels. The taxpayer submits the necessary forms without any special notification or explanation for their previous delinquency.

The first component is filing delinquent FBARs. This is done using the BSA E-Filing System, where the taxpayer submits FinCEN Form 114 for each non-compliant year. This form details their foreign financial accounts, including the maximum value held in each during the respective year.

The second component involves amending past tax returns to report any previously omitted income from these foreign accounts. The taxpayer files Form 1040-X, Amended U.S. Individual Income Tax Return, for each relevant tax year. On this form, they declare the untaxed earnings, calculate the additional tax owed, and submit payment for back taxes and accrued interest.

IRS Scrutiny and Potential Consequences

Opting for a quiet disclosure is a high-risk maneuver due to the IRS’s sophisticated detection capabilities and severe penalties. The agency uses automated systems to identify late-filed FBARs and amended tax returns that report foreign-source income. This capacity is augmented by data from foreign financial institutions, making it improbable that such filings will go unnoticed.

If the IRS identifies a quiet disclosure, it can lead to a civil examination and substantial financial penalties. For non-willful violations, where the failure to file was due to negligence, the IRS can impose a penalty of up to $16,536 per violation. This penalty is generally assessed for each year an FBAR was not filed.

If the IRS determines the failure to file was willful, the consequences are more severe. A willful violation implies a conscious disregard of a known legal duty. In such cases, the civil penalty can be the greater of $165,353 or 50% of the highest aggregate balance of the foreign accounts during the year of the violation, and can be applied for multiple years.

Beyond FBAR penalties, the taxpayer is also liable for penalties on the underpaid tax, typically a 20% accuracy-related penalty. Willful non-compliance may be referred for criminal investigation. A quiet disclosure offers no protection from criminal prosecution, which can result in significant fines and imprisonment.

Official IRS Resolution Programs

The IRS provides several formal programs to help taxpayers resolve past FBAR and tax non-compliance without resorting to a quiet disclosure. These programs offer a structured path to correcting errors while often providing penalty relief. They are the sanctioned alternatives for taxpayers seeking to come into compliance.

The most widely used option for individuals whose conduct was not willful is the Streamlined Filing Compliance Procedures (SFCP). This program is divided into two versions: the Streamlined Foreign Offshore Procedures for taxpayers residing outside the U.S. and the Streamlined Domestic Offshore Procedures for those living within the country. Participants must file three years of amended or original tax returns and six years of delinquent FBARs.

Participants must also certify under penalty of perjury that their failure to comply was non-willful. A benefit of the foreign offshore program is that no penalties are assessed, while the domestic program imposes a reduced miscellaneous offshore penalty of 5% of the highest aggregate account balance.

For taxpayers who correctly reported all income and paid all their taxes but simply failed to file the FBAR, the Delinquent FBAR Submission Procedures (DFSP) is an appropriate choice. This program allows for the late filing of FBARs without penalty, provided the IRS has not already initiated contact. The taxpayer must use FinCEN’s e-filing system and provide an explanation for the late submission.

Another available path is the Delinquent International Information Return Submission Procedures (DIIRSP). This program is for taxpayers who failed to file other required international forms but have reasonable cause for the failure. Under this procedure, the taxpayer files the delinquent forms attached to an amended tax return and includes a detailed statement explaining the reasonable cause. A waiver of penalties is not automatic and depends on the IRS accepting the taxpayer’s explanation.

Required Information for Official Programs

Successfully navigating the official IRS resolution programs requires thorough preparation and the compilation of specific documents. Before initiating any disclosure, the taxpayer must assess if their past conduct was willful or non-willful. The IRS evaluates willfulness based on factors like the taxpayer’s professional background, efforts to hide accounts, and the overall pattern of non-compliance.

A collection of financial documentation is necessary. The taxpayer must gather complete bank and financial account statements for all foreign accounts for the entire look-back period, which is typically six years for FBAR filings under the streamlined procedures. These statements are the source for determining the highest account balances for each year.

Accurate tax calculations are also a prerequisite. This involves gathering all data needed to prepare or amend U.S. tax returns, usually for the last three years. The taxpayer must calculate all previously unreported income, such as interest and dividends from the foreign accounts, and determine the correct tax liability and interest.

For those using the Streamlined Filing Compliance Procedures, a detailed narrative statement certifying non-willful conduct is required. This statement, often on Form 14653, must provide a complete account of the facts explaining the failure to report. It should detail the taxpayer’s background, the origins of the foreign accounts, and the specific reasons for the compliance failure.