If you made a mistake on your tax return, such as choosing the wrong filing status or forgetting to claim a tax credit, you can file an amended tax return with the IRS. But what if you plan on filing an amended tax return to disclose unreported income? Technically you can, and in some narrow, non-willful situations a so-called “quiet disclosure” may be a reasonable approach. In many other cases, however, it carries real risk and a formal IRS program is the safer route. The right path is highly fact-specific. Below we explain how the IRS views quiet disclosures, the risks they can create, situations where they may make sense, and the formal alternatives, including the Voluntary Disclosure Practice (VDP), the Streamlined Foreign Offshore Procedures (SFOP), the Streamlined Domestic Offshore Procedures (SDOP), and the Delinquent International Information Return Submission Procedures (DIIRSP). Because the analysis turns on your specific facts, you should always speak with a tax attorney before deciding.
What Is Quiet Disclosure to the IRS?
An IRS quiet disclosure means declaring previously unreported income informally, rather than using a formal IRS disclosure or amnesty program. To perform a quiet disclosure, taxpayers simply file an amended tax return, or delinquent Foreign Bank and Financial Accounts Report (FBAR), directly with the IRS, without declaring that the return includes previously unreported income.
- Quiet disclosures typically involve foreign or offshore income, but they can relate to domestic income, too.
- Taxpayers might attempt to use quiet disclosures to subtly and quickly resolve non-compliance issues while avoiding the process of applying for IRS amnesty programs.
- Most taxpayers use quiet disclosure methods to correct genuine oversights and reporting errors; however, others may attempt to disclose quietly to avoid IRS scrutiny for deliberate concealment.
Unfortunately, it’s the possibility of using quiet disclosures for tax fraud that can make them a concern for the IRS in the wrong fact pattern. Let’s take a closer look at the issues.
How Does the IRS View Quiet Disclosures?
The IRS generally prefers that taxpayers use one of its formal disclosure programs rather than quietly amending, particularly in foreign reporting matters and in any case where there is a risk that the conduct could be characterized as willful. How the IRS perceives a filing can affect penalty exposure and, in serious cases, criminal risk. Here’s why a quiet disclosure can involve risk with the IRS.
- Tax Evasion: Where there are badges of fraud or willful conduct, the IRS may treat a quiet disclosure as an attempt at tax evasion rather than a good-faith correction. This risk is highest when there are foreign accounts, large unreported amounts, or repeated noncompliance.
- Penalty Avoidance: The IRS may view a quiet disclosure as an attempt to correct unreported income without addressing applicable late or delinquent return penalties, particularly where larger dollar amounts or repeated noncompliance are involved.
- Lack of Fairness: Quiet disclosures detract from applying for recognised, formal amnesty programs, meaning there’s a risk that those who choose such programs are subject to greater scrutiny even if they’re following IRS guidelines.
- Lost Revenue Collection: Unsurprisingly, the IRS takes issue with any tax filing or tax planning strategy which undermines its annual revenue collection.
The short answer? Whether a quiet disclosure is appropriate depends on the facts. Some non-willful, low-risk corrections, such as a missed item on a domestic return with no foreign reporting issues, may reasonably proceed by amended return. Others, especially those involving foreign accounts or possible willfulness, are far better resolved through a formal program. If you’re considering a quiet disclosure, contact us to discuss your situation with FBAR lawyers.
What Are the IRS Quiet Disclosure Risks?
In the wrong fact pattern, a quiet disclosure can carry significant risk. The risks below are most likely to apply where there are foreign reporting obligations, larger dollar amounts, or any indication of willfulness. They are less likely, though never zero, in small-dollar, clearly non-willful situations such as a missed cryptocurrency transaction on an otherwise straightforward domestic return. Foreign reporting deserves special caution: even a quiet correction of a missed FBAR, Form 8938, Form 5471, or other international information return can trigger substantial penalties.
- Criminal Prosecution: Any taxpayers found willfully non-compliant with the IRS face criminal investigations and prosecution which can attract steep fines and jail time. Our tax crime lawyers are standing by to help if you find yourself facing scrutiny for such issues.
- Tax Penalties: Taxpayers face significant penalties, including non-willful and willful FBAR penalties, foreign trust non-disclosure charges, criminal fines, and civil fraud penalties.
- Increased IRS Scrutiny: Any taxpayers who are caught making a quiet disclosure on delinquent returns could be more likely to face IRS scrutiny, including intensive tax audits, on future returns.
- Lack of Protections: Quiet disclosures don’t offer the protections offered by amnesty programs, such as penalty waivers and abatements, and protection from criminal prosecution for certain voluntary disclosures.
When Might a Quiet Disclosure Be Appropriate?
Despite the risks above, there are limited situations where filing a corrective amended return outside a formal program can be a defensible choice. The common thread is that the conduct is clearly non-willful, the dollar amounts are modest, and there is no foreign reporting component. Examples include:
- A small, clearly non-willful error on a domestic return with no foreign reporting component, such as a forgotten brokerage 1099 or a small omitted income item.
- Cryptocurrency reporting corrections where there is no FBAR or international information return exposure, the amounts are modest, and there are no other badges of fraud.
- Inadvertent computational or clerical errors with minimal additional tax due and no indication of willfulness.
Foreign reporting deserves a separate warning. A quiet disclosure of a missed FBAR, Form 8938, Form 5471, Form 3520, or other international information return can still trigger substantial penalties because those penalty regimes apply on a per-form, per-year basis regardless of whether the taxpayer self-corrects. In those cases the formal programs (SFOP, SDOP, VDP, or DIIRSP) generally provide materially better protection than a quiet amendment. Because the analysis is fact-specific, always discuss your situation with a tax attorney before filing.
What Are the Alternatives to IRS Quiet Disclosures?
The IRS understands that everyone can make tax return mistakes and offers structured procedures for correcting them. For many situations, especially those involving foreign accounts, larger dollar amounts, or any potential willfulness, a formal program is the safer route than a quiet disclosure. While these programs do not protect taxpayers from future tax audits or IRS scrutiny, they allow individuals to correct past non-compliance openly and on a defined track. Below we cover four of the main formal alternatives: the Streamlined Foreign Offshore Procedures (SFOP), the Streamlined Domestic Offshore Procedures (SDOP), the Voluntary Disclosure Practice (VDP), and the Delinquent International Information Return Submission Procedures (DIIRSP). Choosing among them, or deciding that an amended return is the right move in your specific case, is a judgment call best made with counsel.
1. Streamlined Foreign Offshore Procedure (SFOP)
The SFOP allows U.S. taxpayers residing outside of the U.S. to correct non-willful non-compliance on their tax returns or FBARs. If you’re eligible, and the IRS agrees you acted negligently rather than intentionally, the IRS won’t impose late or failure to file penalties. You’ll also be exempt from information return and FBAR penalties.
Taxpayers can only use this option if they meet the IRS definition of residing outside of the U.S. and they’re prepared to certify that they acted negligently or made a mistake rather than deliberately withholding income.
To be eligible to use SFOP, individuals must be U.S. taxpayers who, within at least one of the last three years:
- Did not have a U.S. residence; and
- Stayed in the U.S. for less than 35 days.
So, for example, if you’re a U.S. taxpayer who lived abroad last year, only returned for a few weeks to visit family, and had no U.S. abode, you meet this eligibility criteria.
The process itself is straightforward.
- File your tax returns for the last three tax years—file delinquent returns for any you didn’t file and amended returns for any you’re correcting.
- Include any relevant information returns such as Form 8938 or Form 5471 alongside each return.
- At the top of each page of a delinquent return, amended return, or information return, include, in red, “Streamlined Foreign Offshore”. Otherwise, you will not benefit from the SFOP’s unique protections.
- Use Form 14653 to certify non-willful non-compliance.
- If you’re filing FBARs, file the last 6 years and do so electronically noting that they’re part of the streamlined procedure.
- Be prepared to submit any foreign asset information the IRS requires upon request. Otherwise, they could reject your application to use the program.
2. Streamlined Domestic Offshore Disclosure (SDOP)
The IRS SDOP allows U.S. taxpayers residing in the U.S. to correct incorrect or delinquent returns, or any other non-willful non-compliance, without facing penalties for late or otherwise erroneous returns. As with SFOP, you’ll only be exempt from penalties if the IRS agrees you acted innocently e.g. a genuine misunderstanding of the law rather than choosing to conceal income or ignore a filing deadline. The procedure is very similar to the SFOP.
- Prepare and submit wrong or missed tax returns for the last three years. Complete new tax returns for delinquent returns and amended returns for correcting mistakes.
- Submit any relevant information returns e.g. Form 3520 or Form 3520-A for each return.
- Mark on the front page of each return, and every information return, “Streamlined Domestic Offshore” or you may be ineligible for the SDOP penalty protections.
- Certify using Form 14654 that you are a U.S. resident and acted in error.
- Also file FBARs for the last 6 years through the online procedures.
As with the SFOP, be prepared to submit foreign asset information upon request or else the IRS will reject your application to use this procedure.
3. Voluntary Disclosure Practice (VDP)
The Voluntary Disclosure Program allows taxpayers who deliberately failed to comply with their tax reporting obligations to disclose the non-compliance, correct the delinquencies, and, critically, reduce the risk of criminal prosecution or severe penalties. While there’s no guarantee you’ll be safe from prosecution, the IRS will give serious consideration to your full and timely disclosure of deliberate non-compliance when deciding whether to recommend criminal proceedings.
You can only use the VDP if the IRS has no prior notification of your willful non-compliance. Notification can include:
- Third party alert e.g. through another government agency
- Summons
- Search warrant
- Grand jury subpoena
Meaning, if there’s any risk the IRS has already started criminal or civil proceedings against you for non-compliance, it may be too late to use VDP.
So, how does the VDP work? As with the other IRS amnesty programs, there’s a clear procedure for moving forward. But this time, there are two parts: Part I and Part II.
Part I
VDP Part I is a preliminary assessment of your eligibility to participate in the program.
- Complete IRS Form 14457, Voluntary Disclosure Practice Preclearance Request and Application.
- Include all relevant financial information requested on the Form. Be prepared to disclose additional details upon request.
- Fax your Form 14457 to 844-253-5613.
The IRS Criminal Investigation (CI) unit will review your request and determine whether you can proceed to Part II. If you’re rejected to move forward, contact our experienced IRS tax lawyers immediately for advice on how to handle your tax debt situation.
Part II
If you’re accepted for preclearance, submit Part II of Form 14457 to CI within 45 days. CI will send a Preliminary Acceptance Letter if you’re accepted and you’ll be contacted by the IRS.
Can’t submit Part II on time? You can request one 45-day extension but further extensions will not be granted.
If you’re unsure whether you qualify for the non-willful or willful IRS amnesty programs, Gordon Law is happy to help you determine your eligibility.
4. Delinquent International Information Return Submission Procedures (DIIRSP)
The DIIRSP is a narrower IRS procedure for taxpayers who failed to timely file one or more required international information returns, such as Form 5471, Form 5472, Form 8865, or Form 8938, but who have no unreported tax liability. It is often a better fit than a quiet disclosure where the only issue is a missed informational form. To use DIIRSP, you must:
- Have reasonable cause for each failure to timely file the delinquent information return.
- Have no unreported income associated with the delinquent forms.
- Not currently be under civil examination or criminal investigation by the IRS, and not have already been contacted by the IRS about the delinquent returns.
If you qualify, you submit each delinquent form with a statement explaining the reasonable cause for the late filing. Because the IRS no longer grants automatic penalty relief under DIIRSP and reasonable cause is highly fact-specific, the support of experienced counsel can materially affect the outcome.
Do I Need a Tax Lawyer?
Whether you’ve already made a quiet disclosure or you’re facing IRS investigations, you should never feel obliged to handle the matter alone. It’s always worth seeking legal advice before making any decisions regarding your delinquent returns. Here’s why.
- Risk Assessment: The Gordon Law tax lawyers can review your unique tax situation, help you understand the risks of making a quiet disclosure, and explore the best ways to mitigate tax penalties for non-compliance.
- IRS Amnesty Application Support: Our experienced team will guide you through the entire process of applying for any IRS amnesty program, whether you’re looking to avoid criminal prosecution for a delinquent return or you’re correcting simple calculation errors.
- Information Gathering: The IRS may request detailed information when deciding how to handle your application. We will help you gather the relevant evidence to support your claim, allowing you to meet IRS obligations with ease.
- Tax Law Advice: Tax law is highly nuanced and changeable. We will arm you with knowledge, based on current tax law, so you can make empowered and informed decisions regarding your tax filing issues.
- Negotiations and Appeals: Whether you’re facing IRS penalties or appealing an IRS decision, our attorneys will stand with you, negotiating with the IRS on your behalf and guiding you through any tax appeal or IRS hearing.
Crucially, the tax lawyers at Gordon Law won’t just help you through your current delinquent tax problem. We’ll help you identify ways to improve your future tax planning and stay on top of your obligations so there’s less risk of non-compliance down the line.
Worried About Delinquent Tax Returns? Contact Gordon Law!
A quiet disclosure can be the right answer in narrow, non-willful circumstances, but it can also create real exposure depending on your facts, particularly where foreign accounts, larger dollar amounts, or any indication of willful conduct are involved. Before deciding how to report previously undeclared income to the IRS, talk with a tax attorney to weigh your options. The Gordon Law team can assist. We’ll identify your risk level, explain your compliance options, and help you make informed, empowered decisions regarding your tax returns. To learn more about our services and to discuss your compliance issues, contact us online or call us now.
