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February 13, 2017


IRS Assesses Another 150% Civil FBAR Penalty

The IRS has asserted multiple maximum civil FBAR penalties against Ashvin Desai, who failed to disclose the existence of offshore accounts or report interest income from the accounts on his tax returns. Desai, a sixty-four year old born in Mumbai, India, was sentenced last week to six months of imprisonment in his criminal trial.

Desai, the owner of a medical device manufacturing business in San Jose, California, owned several foreign accounts at HSBC in India and Dubai. Some of the accounts were held in the names of his wife and adult children. To fund the accounts, Desai mailed checks from the United States or wired funds from other foreign accounts in Singapore and the United Kingdom.

From 2007 through 2009, Desai paid approximately $17,000 in taxes, despite owing an additional $357,783 in taxes from nearly $1.1 million in unreported income. As evidence of willfulness, the government introduced emails sent by Desai to HSBC bankers, with instructions not to send bank statements to his home address. On at least one occasion, he also directed a customer to wire payments directly to his undeclared HSBC India account. In addition to filing false returns for himself, Desai was convicted of advising and counseling his adult son and daughter to file false returns during the same time period.

Desai sought an acquittal, arguing that he lacked the willful state of mind required for a criminal conviction. He contended that HSBC did not provide him with Forms 1099 as required by law, which would have told him the amount of interest income his accounts earned and tipped him off to the fact that there were reporting obligations in the United States.

According to Desai, representatives from HSBC had told him that any taxes owed in the United States would be automatically deducted, and that he would “not need to file any taxes in the USA.” He checked “no” on line 7a of his Schedule B, which asked whether he had a financial interest in any foreign accounts, despite the fact that he had disclosed another account at Citibank Singapore earlier on the same page. He cited this inconsistency as evidence that he misunderstood the question and did not believe that he needed to disclose the HSBC accounts.

Despite a Federal Sentencing Guidelines range of 78-97 months, the court imposed a sentence of only six months of incarceration, with an additional 6 months and a day to be served on home confinement. The government had asked for a sentence at the high end of the guidelines range, “to send a message to other wealthy Americans that hiding money abroad has serious consequences.”

The defense had asked for just six months of home confinement, with no term of incarceration, saying that sending Desai to prison would cause him to become unemployed and would prevent him from providing important medical devices to doctors and hospitals around the world. Employees of Desai’s business raised concerns that the company would collapse, putting 30-40 people out of work. Several doctors wrote letters of support on Desai’s behalf, including one who said that, “Without someone like Ashvin around, urological advancement would definitely take a step backwards.” The defense also cited Desai’s role as caretaker for his ninety-two year old mother.

On the eve of sentencing, the IRS asserted maximum civil FBAR penalties for 2007 through 2009, totaling fifty percent of the highest account balance during each year. The resulting penalty of $14.2 million far exceeds the approximately $8 million that had been concealed in the undisclosed accounts, and the $357,783 in taxes that he owes. This civil penalty will likely be litigated in the near future, and Desai has already hinted in sentencing memorandums that he will raise Eighth Amendment concerns regarding the amount of the penalty, which he calls “vindictive, draconian, and constitutionally odious.”

This case, combined with the much publicized Zwerner case that recently came out of Florida, signals that the IRS is adopting a more aggressive approach on FBAR penalties. In Zwerner, a jury upheld a “150% FBAR penalty” of $3,090,000 against an American business man and bank director, who maintained what he called a “secret account” at a Swiss bank. The parties ultimately settled for $1,468,971, plus interest, before the court reached the Eighth Amendment issue.

By contrast, those who come forward under the ongoing IRS Offshore Voluntary Disclosure Program (OVDP) face a one-time penalty of 27.5% of the highest aggregate balance in their previously undisclosed offshore accounts, with immunity from criminal prosecution. The program, which was first offered in 2009, has brought tens of thousands of U.S. taxpayers into compliance.

Last month, the IRS announced new Streamlined Domestic Offshore Procedures, which apply to U.S. residents whose failure to disclose foreign accounts was non-willful. Those who qualify are eligible for a reduced penalty equal to five percent of the highest year-end balance, rather than the 27.5% penalty provided by the OVDP. Since those making submissions under these new procedures do not have immunity from criminal prosecution, it is important to first seek counsel from a qualified attorney.