Thursday, May 26, 2011

HSBC Client Prosecuted After Quiet Disclosure Of Offshore Account

Illustrating the government's tough approach on offshore account disclosure, the U.S. has criminally prosecuted a taxpayer who made a “quiet disclosure” of his offshore HSBC account, instead of using IRS's 2009 Offshore Voluntary Disclosure Initiative (OVDI). A plea agreement has been reached on the charge.

Background. Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing a Report of Foreign Bank and Financial Accounts (Form TD F 90-22.1 (FBAR)), with Treasury on or before June 30 of the succeeding year.

In the spring of 2009, IRS announced a settlement offer for those that voluntarily and timely disclosed unreported offshore income for 2003—2008. Those meeting the terms of the 2009 OVDI had to pay back taxes and interest for six years, and pay either an accuracy or delinquency penalty on all six years. They also had to pay a penalty of 20% of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value. However, those who came forward on a timely basis did not face criminal prosecution. The original deadline of Sept. 23, 2009, was extended to Oct. 15, 2009.

In February 2011, IRS announced a second OVDI offer for taxpayers with undisclosed income from hidden offshore accounts for the 2003—2010 period. The terms of the offer are similar to those that applied for the first settlement offer, but the penalty structure is different. The general rule is that the penalty is 25% based on amounts in foreign bank accounts, but it can be as low as 12.5% or 5% for some taxpayers.

A “silent disclosure” occurs when a U.S. taxpayer with an undeclared foreign account files FBARs and amended returns and pays related taxes and interest for previously unreported offshore income without notifying IRS of the undeclared amount through the OVDI. IRS warns taxpayers that make silent disclosures instead of using the OVDI process that they risk being criminally prosecuted for applicable years.

Facts. According to a criminal information document filed in the U.S. District Court for the District of Massachusetts, Michael Schiavo, a Boston bank director, failed to report his interest in offshore accounts on an FBAR for the 2003 through 2008 tax years.

The government alleged that Schiavo hid $99,273 from a partnership that invested in medical devices in an undeclared account at HSBC Bank Bermuda. Schiavo's partner, Peter Schober, directed the funds to HSBC in 2006 from a UBS account in Switzerland, which was also undisclosed.

The court document claimed that Schiavo willfully failed to file FBARs disclosing his financial account in Bermuda for tax years 2003—2008. Additionally, for those years, he represented on his Schedule B, 1040, that he didn't have an interest in a foreign financial account and failed to report his income from the partnership, or the interest that accrued on the Bermuda account.

On Oct. 6, 2009, following news of UBS's disclosure to IRS of undeclared accounts held by U.S. taxpayers, Schiavo made a quiet (but partial) disclosure by preparing and filing FBARs and amended tax returns for the 2003—2008 tax years. He did not participate in the 2009 OVDI, although his disclosure was made nine days prior to the end of the amnesty period. In his October 6 disclosure, he revealed to IRS that he had an interest in an HSBC account in Bermuda, but failed to report his income on his 2006 tax return from his partnership.

Subsequently, an IRS Special Agent attempted to interview Schiavo at his home on Oct. 27, 2009.

Thereafter, Schiavo prepared and executed a second amended return for the 2006 year where he reported the income he earned from his partnership that was ultimately deposited into his then-undisclosed HSBC account in Bermuda.

According to the Department of Justice (DOJ), a plea agreement has been reached under which Schiavo agreed to pay a civil money penalty of $76,283, half the value of high balance of the HSBC Bank of Bermuda account, for failing to file the FBAR. He faces up to five years in prison, followed by three years of supervised release and a $250,000 fine. He was charged separately with failing to disclose a secret UBS AG bank account and is awaiting sentencing.

Practitioner reaction. Trial attorney Jeffrey A. Neiman (who was an Assistant U.S. Attorney involved with the prosecution of the UBS AG case), said the lesson of the case was that if a taxpayer is going to make a disclosure to the IRS, they had better make a complete and truthful one. “If you are going to come in the door, you can't come partially in the door,” he said. “You need to come completely clean, otherwise you are committing another crime by filing another false tax return.”

Charles Chromow of Wuersch & Gering LLP (New York) agreed and opined that Schiavo did not initially make a full silent disclosure because he failed to disclose his income from the partnership on his initial 2006 amended return. Chromow also said that although the DOJ charged Schiavio with failure to file an FBAR, other criminal charges that could have been filed include the willful attempt to evade or defeat tax under Code Sec. 7201 or the willful filing of false tax return under penalties of perjury (i.e. for the taxpayer's failure to include his partnership income on his 2006 return) under Code Sec. 7206(1).

The maximum fines for the uncharged crimes are $100,000 for an individual. Conversely, the maximum fine for willfully failing to file an FBAR is $250,000. The maximum prison sentence for a willful failure to file an FBAR or for a crime under Code Sec. 7201 is five years, while the maximum sentence for a crime under Code Sec. 7206(1) is three years.

References: For voluntary disclosure as defense in criminal tax case, see FTC 2d/FIN ¶V-3829; United States Tax Reporter ¶72,014.15; TaxDesk ¶871,019; TG ¶71869.

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