By Nicholas Eusanio, Esq., LL.M
The tax attorneys at Nardone Law Group in Columbus, Ohio routinely advise taxpayers about the Internal Revenue Service’s Offshore Voluntary Disclosure Program and the importance of coming forward to report previously undisclosed foreign financial accounts—including inherited accounts—to the IRS. Under certain circumstances, federal tax law requires a U.S. taxpayer with an interest in a foreign financial account to report that foreign financial account interest to the IRS by filing a Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (“FBAR”). The purpose of the IRS’ Offshore Voluntary Disclosure Program is to allow noncompliant taxpayers to: (1) file certain required returns and forms related to disclosing foreign accounts—such as the FBAR; (2) disclose previously unreported income related to the foreign accounts; and (3) pay tax on that foreign income, while reducing the risk of high civil penalties and potential criminal exposure related to their prior noncompliance. But, some taxpayers are uncertain as to whether the Offshore Voluntary Disclosure Program applies to their specific situation—particularly when it comes to inherited foreign financial accounts.
NLG Comment: For more information on the requirements for filing the FBAR related to foreign financial accounts, please see our prior article regarding the FBAR Filing Requirement.
One problem we have noticed is that many taxpayers believe their inherited foreign financial accounts do not need to be formally disclosed through the IRS’ Offshore Voluntary Disclosure Program. These taxpayers think that that because they received minimal interest income from the inherited accounts, the IRS Offshore Voluntary Disclosure Program is unnecessary. Rather, these taxpayers believe they can simply file the previously un-filed FBARs disclosing their inherited foreign financial accounts to the IRS. This practice is known as making a "silent disclosure" or a "quiet disclosure." In fact, some taxpayers have even informed us that other professionals advised them that their inherited foreign account did not require a formal Offshore Voluntary Disclosure, and that a silent disclosure or quiet disclosure was more appropriate.
NLG Comment: For more information on the pitfalls of making a silent disclosure or quiet disclosure, please see our prior article on the IRS Chasing Down Quiet Disclosures.
Unfortunately, though, inherited foreign financial accounts do not necessarily automatically fall outside the IRS’ Offshore Voluntary Disclosure Program. The fact that the funds were inherited and produced minimal interest income in the account is irrelevant. There is no threshold income amount that a foreign account must produce to make the IRS Offshore Voluntary Disclosure Program applicable. If a taxpayer has any amount of unreported income on which no tax has been paid, the taxpayer must utilize the formal disclosure process of the IRS’ Offshore Voluntary Disclosure Program, or risk the various civil penalties and possible criminal exposure that could apply outside the Offshore Voluntary Disclosure Program. It is only in the scenario where there is absolutely no income related to a taxpayer’s foreign account that a silent disclosure or quiet disclosure may make sense. Thus, it is very important to consult an experienced tax attorney to determine whether disclosing an inherited foreign financial account through the IRS’ Offshore Voluntary Disclosure Program, or through a silent or quiet disclosure, is best.
Nardone Law Group represents businesses and individuals in federal and state tax issues, including the Offshore Voluntary Disclosure Program and federal tax requirements for reporting foreign financial accounts, foreign income, and foreign assets. If you have unreported foreign income, or an undisclosed foreign account, asset or entity, you should contact an experienced tax attorney today. Nardone Law Group’s tax lawyers and professionals have vast experience representing clients before the IRS. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available, including the Offshore Voluntary Disclosure Program. Contact us today for a consultation to discuss your case.