With the deadline to participate in the 2011 Offshore Voluntary Disclosure Initiative (OVDI) approaching, the U.S. government decided to prosecute a taxpayer who made a so-called “quiet disclosure” of his offshore account at HSBC. The U.S. filed a criminal information in the U.S. District Court for the District of Massachussets against Michael Schiavo, a Boston banker.
According to the information filed in court, Mr. Schiavo failed to report his interest in several offshore accounts for the tax years 2003 through 2008. After the news and widespread coverage of the UBS case and its decision to provide account information to the U.S., Mr. Schiavo decided to amend his tax returns and submitted Foreign Bank Account Returns (FBARs) to the IRS and Department of Treasury. A situation whre the taxpayer files amended returns and pays any related tax and interest for previously unreported offshore income, but without first notifying the IRS or participating in a voluntary disclosure program is known as “quiet disclosure. Mr. Schiavo decided to do a quiet disclosure of his offshore account rather than participate in the voluntary disclosure program.
The government alleges that he hid more than $90,000 from a partnership that invested in medical devices, in an undeclared account at HSBC Bank Bermuda. According to the information, Mr. Schiavo’s partner, Peter Schober, transferred the funds to HSBC in 2006 from a UBS account in Switzerland, which was also undisclosed.
The court document claims that Mr. Schiavo willfully failed to file FBARs with the Department of Treasury for the tax years 2003 to 2008. Additionally, his tax returns failed to include his interest in a foreign financial account or the income from partnership. The government claims that the failure to include such income deprived the IRS of $40,624.
On October 6, 2009, Mr. Schiavo made a quiet disclosure by preparing and filing FBARs and amended tax returns for the 2003 through 2008 tax years. He did not participate in the 2009 Offshore Voluntary Disclosure Program, although his disclosure was made nine days prior to the end of the amnesty period. In his October 6 disclosure, he revealed to the IRS that he had an interest in an HSBC account in Bermuda, but he failed to report his income on his 2006 tax return from his partnership. Later, Mr. 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 HSBC account in Bermuda.
The Schiavo case leaves open a possibility that the government can prosecute quiet disclosure cases, especially if the disclosure is incomplete or misleading. It is possible that had Mr. Schiavo fully disclosed his income in his first amended return in his quiet disclosure, the government would not prosecute him. However, this case still raises some serious question about doing a disclosure quietly. What is certain, that a disclosure must be complete and truthful.
The 2011 OVDI program provides for a significant penalty of 25% of the value of the offshore accounts, and seemingly applies the penalty regardless of whether the taxpayer willfully evaded tax obligations or not. For many taxpayers, it poses a question of whether the OVDI penalty is excessive. Those taxpayers who seek the IRS to consider the willfulness and reasonable cause arguments, would need to opt out of the program, leaving all the penalties and all the years on the table. For those taxpayers who consider whether to participate in the 2011 OVDI program, or to make a quiet disclosure, the Schiavo case brings another issue to consider and think about.
Copyright (c) 2011 Igor S. Drabkin. All Rights Reserved.