Foreign Accounts & Quiet Disclosures

There is a general, overriding principle in the world of Federal Tax that goes something like this: if you voluntarily come forward to admit your prior tax shenanigans and get yourself back in the good graces of the IRS, there will be less negative consequences than if the IRS catches you trying to get away with it.

This principle holds true with respect to the reporting of foreign bank accounts.  Taxpayers who are caught hiding assets in foreign accounts are subject to criminal prosecution, and could very well face jail time.  But under the IRS voluntary amnesty programs, those who come forward and disclose their offshore assets are promised they won’t go to jail in exchange for payment of penalties that are based on a percentage of their account balances.

There are some who want to get back on the grid without having to pay hefty penalties.  They do this by making a so-called “quiet disclosure” of foreign assets; they report their foreign accounts without giving the government information about accounts held in previous years.  This type of disclosure sometimes tricks the IRS into believing the accounts are brand new.

According to a recent report by the Government Accountability Office (GAO), there may be more quiet disclosures happening around the nation than the IRS has the ability to identify.  The IRS is taking tips from GAO on how to detect more of these quiet disclosures.

TIGTA Detects Unauthorized Disclosure at IRS

The Treasury Inspector General for Tax Administration (TIGTA) recently published a report expressing concern over the submission of tax account transcripts to tax professionals through E-services.  The concern is that confidential tax records are being sent without proper authorization.

Proper authorization normally means the signing of a Form 2848 Power of Attorney (POA).  When this form is submitted to the IRS by mail or by fax, the “CAF Unit” reviews the form for accuracy and completeness and updates IRS computers accordingly.  Then, when the tax professional (tax attorney, CPA, enrolled agent) contacts the IRS, they may obtain access to the taxpayer’s tax account and they may request tax account records either by phone, by fax, or online through E-services.

However, some tax professionals are authorized to submit Form 2848 electronically through IRS’ E-services.  Electronic POA processing works differently, in that the tax professional is able to gain immediate access to sensitive tax records without human verification that the Form 2848 has been completed correctly.  TIGTA’s concern in this audit was that some tax professionals may be submitting a “preliminary” or incomplete Form 2848 as a way to handle their most pressing tax problems immediately and then getting the required signatures afterwards.  Or worse, some may be failing to secure a fully-executed POA at any point during the representation.

Of course, TIGTA did test this hypothesis using its customary small sample size, so we don’t really know how big of a problem this really is.  Also, we don’t know if the problem extends to the tax relief community or if it is limited to tax preparation.  But any breach in the process that could result in unauthorized disclosure of tax information should be taken seriously.