The Danger of a Quiet Disclosure

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The Danger of a Quiet Disclosure

On April 3, 2020, the Department of Justice issued a press release regarding the guilty plea of Dusko Bruer for counts of tax evasion and willful failure to file a Report of Foreign Bank or Financial Account (“FBAR”).

 

Dusko Bruer owned and operated a company that bought U.S.-made agricultural machinery and parts and sold them throughout the world. Bruer did not take a salary from the company.  Instead, he used millions of dollars from the company’s bank accounts for his own expenses and investments. The press release states that “From 2007 through 2011, Bruer transferred over $5.8 million of the company’s profits to foreign financial accounts. Bruer used the company’s profits to buy a yacht, purchase a waterfront home for his girlfriend and himself, purchase a home for an employee, and buy real property in Serbia. Between 2007 and 2014, Bruer failed to report more than $7.7 million in income and did not pay taxes of more than $2.7 million that were due to the United States.”  See DoJ Press Release.

The company never filed a corporate tax return nor did the company ever pay taxes on its income. Bruer also never filed employment tax returns during those years reporting wages that the company paid to its employees nor did the company withhold and pay over payroll taxes.

Further, from 2007 through 2015, Bruer maintained financial accounts in Croatia, Germany, Serbia, and Switzerland. He did not report his interests in any of these accounts on an FBAR. Instead, “Bruer used the assets in his foreign accounts for personal use, including the purchase of a yacht for $1,350,000 and a 3,200 square foot home in Lake Worth, Florida, with 100 feet of waterfront frontage for approximately $1,650,000.”  See DoJ Press Release.

Up through 2014, Bruer never filed a personal tax return nor did he pay tax on his income. But “[i]n 2015, Credit Suisse closed his account in Switzerland and advised him to enter the IRS’s Offshore Voluntary Disclosure Program (OVDP), by which taxpayers could avoid criminal prosecution by making a voluntary disclosure directly to IRS-Criminal Investigation, filing six years of delinquent or amended income tax returns, as well as delinquent or amended FBARs, paying back taxes, interest, and certain penalties on the six tax years in the disclosure period, and paying a penalty on the highest aggregate account balance of their noncompliant offshore assets.” See DoJ Press Release.  Bruer ignored the advice, which may have mitigated his criminal exposure had he heeded the advice.

Instead of entering the OVDP, Bruer made a “quiet disclosure.” In a quiet disclosure, the taxpayer files or amends the delinquent returns without notifying or flagging the returns for the IRS in any way or as any part of IRS voluntary compliance program.  The OVDP and its non-willful sister, the Streamlined Disclosure Offshore Program (“SDOP”), contain penalty mitigation provisions for taxpayers coming into voluntary compliance, and the OVDP (which has since changed) provides mitigation of criminal exposure.  A quiet disclosure does not provide any such protections.

In making the “quiet disclosure”, Bruer actually filed false returns because the returns “disclosed only the funds he held in the Credit Suisse account and not the funds he held in the accounts in Croatia, Germany, Serbia, nor did they report the income he earned from his company.”  See DoJ Press Release.

Taxpayers and practitioners should note that while quiet disclosures may sometimes make strategic sense, they have definite risks, as demonstrated here.  Further, the government has made it exceedingly clear that it will prosecute taxpayers that make false quiet disclosures.  Bruer faces a maximum sentence of five years in prison for each charge, three years of supervised release, restitution, and monetary penalties.  His sentencing is currently scheduled for June 12, 2020.