Following last month's Zwerner decision, in which a Florida jury upheld three 50% civil FBAR penalties against a business man and banker, the IRS has again imposed the maximum civil FBAR penalty against a taxpayer for three years.
Ashvin Desai, a medical device manufacturer living in San Jose, California, was sentenced to six months in prison and six months and one day of home confinement last week after being convicted of filing false returns and failing to file FBARs for 2007-2009. During these years, Desai failed to report more than $1.2 million in interest income earned through offshore accounts at HSBC in India and Dubai. Desai paid approximately $17,000 in taxes from 2007 through 2009. According to the IRS, he should have paid an additional $357,783 in taxes on his unreported interest income.
As evidence of willfulness, the government introduced emails between Desai and HSBC bankers, where Desai instructed them not to send statements to his home. They also cited the fact that Desai checked "no" on his Schedule B in response to a question asking if he had a financial interest in any foreign bank accounts.
Desai's sentence of six months in prison and six months and one day of home confinement seems incredibly light, considering he faced a sentencing guidelines range of 78-97 months. Defense counsel had asked for only six months of home confinement, saying that incarcerating Desai would prevent him from providing important medical devices to doctors and hospitals around the world, as well as potentially costing 30-40 of his employees their jobs. The government asked for a sentence of 97 months, saying a heavy sentence was necessary "to send a message to other wealthy Americans who would hide money in offshore accounts."
Just days before sentencing, the IRS asserted the civil FBAR penalties against Desai. The penalties, based on 50% of the highest balance during each year, total more than $14.2 million. When this civil case is eventually litigated, Desai will likely argue that such an amount violates the Eighth Amendment's prohibition against excessive fines. By comparison, the amount of taxes Desai evaded during these years totaled $357,783. The Eighth Amendment argument was also raised in Zwerner, but the parties reached a settlement before that issue could be decided.
These recent cases signal that the IRS is adopting a more aggressive position on civil FBAR penalties. In fact, it should be noted that the IRS actually tried to impose four penalties against Zwerner, for 2004 through 2007, but the jury did not find willfulness for 2007, since the government was aware of his offshore accounts and Zwerner was already cooperating in the civil investigation. Prior to Zwerner, most tax professionals operated under the assumption that the worse-case civil FBAR penalty would be 50% of the highest account balance for one year.
For those with still undisclosed offshore accounts, these cases underscore the importance of acting now to come into compliance. With implementation of the Foreign Account Tax Compliance Act (FATCA) underway, foreign banks will soon begin providing information about American clients to the IRS. Once the U.S. authorities are in possession of information about a taxpayer's undisclosed offshore accounts, they are no longer eligible to participate in the Offshore Voluntary Disclosure Program (OVDP) and could be subject to criminal prosecution and draconian civil penalties, as we see in this case.