Saturday, July 12, 2014

HSBC India Client Sentenced Ever So Lightly Given Facts and Trial Conviction Rather than Plea (7/12/14)

Ashvin Desai, an offshore account taxpayer, who was previously convicted after tiral was sentenced to six months in prison and six months and one day of home confinement.  See DOJ Press Release, here.  See DOJ Press Release, here.  I reported the jury conviction at this blog:  HSBC Depositor Convicted (Federal Tax Crimes Blog 10/12/13), here.

Key excerpts (most of the press release, I bold face some it it):
Ashvin Desai, of San Jose, California, was sentenced yesterday to serve six months in prison and six months and one day of home confinement for concealing more than $8 million in foreign bank accounts, the Justice Department and Internal Revenue Service (IRS) announced.  Prior to yesterday’s sentencing hearing, Desai filed with the court a document indicating that the IRS has assessed and demanded payment of a Reports of Foreign Bank and Financial Accounts (FBAR) penalty against him for $14,229,744. 
In October 2013, a jury convicted Desai, a medical device manufacturer, of failing to report his family’s foreign bank accounts to the government on tax returns and FBARs.  The jury also found that Desai failed to disclose more than $1.2 million in interest income generated by these accounts between 2007 and 2009.  Desai was sentenced by U.S. District Judge Edward J. Davila. 
 According to the evidence presented in court, Desai controlled several foreign bank accounts at HSBC in India and Dubai, including accounts held in the name of his wife and adult children.  Desai invested the funds in these accounts in certificates of deposit, which earned interest at rates as high as nine percent.  Desai funded these accounts by mailing checks from the United States and by transferring money from other undeclared bank accounts in Singapore and the United Kingdom to his family’s accounts in India.  Desai also sold medical devices abroad, and, on at least one occasion, directed that his customer wire funds directly to his undeclared HSBC India account. 
 Between 2007 and 2009, Desai paid approximately $17,000 in taxes.  However, Desai owed an additional $357,783 in taxes to the IRS on his unreported interest income.  Desai’s deposits into his foreign accounts also far exceeded the income he disclosed on his tax returns each year.  In 2008, for example, he deposited nearly $1.1 million into foreign accounts while only reporting income of $115,810.91 on his tax return. 
 The evidence at trial demonstrated the steps Desai took to conceal his family’s foreign accounts from the government.  In addition to failing to report his accounts on tax returns and FBARs, Desai also directed the bank not to mail bank statements to his house.  On one occasion, Desai wrote an email in which he asked an HSBC banker: “Why are all the statements coming to Home address?  I thought we had a different arrangement.”
I am seeking some detail on the sentencing and, if I get it, may post more.  In the meantime, my comments are:


  1. From the objective indicators above, Desai's attorneys did a helluva job in getting this sentence, given that he did not plea.  What would have been the sentence had he pled?
  2. Considering the indicated high balance of around $8 million and the reported FBAR penalty of over $14 million, I presume the IRS asserted multi-year willful penalties which, apparently, he has not paid.  I would presume that, unless the IRS backs off, there will soon be some litigation in which the Excessive Fines Clause will again be in play.  However, just superficially, it looks like his facts may be worse than Zerner's.  And, same question as #1:  what would the penalty have been had he pled.  (Readers will recall that, on pleas as reported, the maximum FBAR penalty has been 50% in the single high year.
  3. Note that he funded the offshore accounts by mailing checks.  Of course, had he wired the money from U.S. banks, a record and argument for his transparency to the U.S.  But, he chose a stealth way to fund the offshore accounts.  Not good in terms of willfulness -- both for income tax and for FBAR.
  4. Be careful what you email your enablers.  This advice may be a bit late, but perhaps persons considering opting out or certifying nonwilfulness may want to review the emails to the enablers that may wind themselves into the Government's hands.

25 comments:

  1. Laura Sommer Skrynski, CEOJuly 13, 2014 at 10:29 AM

    Jack, why would you think the IRS is backing off here ? Mr. Ashvin Desai facts are worse than Zerner's. Considering the indicated high balance of around $8 million and the reported FBAR penalty of over $14 million I would be actually surprised to see some litigation in which the Excessive Fines Clause will again be in play.

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  2. I don't think the IRS is backing off. The court backed off for some as yet unknown reason in the sentencing. The IRS appears to be going for the max on the willful penalty. If the high balance were $8 million, then each year's FBAR penalty would (assuming there is some correlation between the high balance and the FBAR penalty base on each respective 6/30) be, say, $4 million per year. Extrapolating from that limited information, the FBAR penalty the IRS asserted was 3 1/2 times. (That is a rough and ready calculation, but the clear inference is that IRS is not backing off..

    Jack Townsend

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  3. Of course there's a record of checks. US banks are required to keep records of paid checks for seven years. His bank statements will show checks clearing just as they would show a withdrawal for a bank wire.

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  4. In the streamlined program, how can the IRS impose a 5% FBAR penalty on accounts which WERE reported on the FBAR but on which taxes were not paid on the original returns? I see no legal basis in this.

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  5. In my state I am required to amend returns once there is a final determination on my Federal return. When does this occur? When the 906 is signed?

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  6. Taxpayer Advocate requesting tax reform suggestions:
    http://www.taxpayeradvocate.irs.gov/Home/tax-reform-suggestions

    Although the FBAR penalty is not part of the Tax Code, it may be worthwhile to continue bringing it up to the Advocate's attention.

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  7. Suzanne, Milan, Jack,
    We have this definition on NW conduct in the certification letter "Non-willful conduct is conduct that is due to negligence, inadvertence,
    or mistake or conduct that is the result of a good faith
    misunderstanding of the requirements of the law." Is this definition coming from IRM?

    A lot of us who have not deliberately tried to hide accounts (e.g. money in tax haven country, mailing checks, etc), or say a self-filer not checking box of overseas account, would be covered under the "negligence", "mistake", "inadvertence" category?

    I wonder if they have intentionally put words "mistake" "negligence" to
    allay concerns with certification for most taxpayers who are not egregious. Any comments?

    Thanks!

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  8. Probably deserves a longer answer. Same reason that the Congress has allowed the IRS to come up with Regulations, Revenue Rulings, Private Letter Rulings, Technical memorandums, etc. These are all extensions of law the IRS has written, and which, an executive branch (IRS), is allowed to formulate because it has to do with interpreting & administering existing tax law (Code) which Congress has written. It's also the same reason that the FBAR, for years has been NOT been filed with the IRS, but which the IRS has the distinct position of enforcing. I see IRS disclosure programs within that same enforcement framework.

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  9. I would say YES. Be careful, NJ & CA have their own OVDPs (or at least had them the last I checked). Most states have a federal-state matching program and for most states, there is NO statute for income NOT reported. So if a state gets wind that you've amended a federal return years ago, say from 1994, but never did a state amendment reflecting that change, they will audit you. This happened to a client of mine (california). The earlier you do the amendment, the better off because less interest and penalties would have accrued. (penalties usually max out, but interest does not).

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  10. I think the information regarding SDOP & SFOP is still pouring out, regardless of these programs being made official by the IRS. One obvious trap is for domestic taxpayers who have not filed returns. They almost have to do a QD with RC. So I imagine we'll hear more from the IRS shortly, or at least from other practitioners talking to the OVDP examiners.


    To your question, I do not think it is a good idea to change the NW certification to cover more than 3 years for the return, but at the same time, there is nothing stopping you from doing more than 3 years of returns. You might for example, want to do 6 years of returns, since the civil statute does not kick in until you file the return. If there is nothing really criminal, and if you have had some information returns you did not file (8938, 3520, 926, 5471, 8891), which needs to have been reported prior to the 3 years, you might consider filing those amendments, outside of the SDOP, but with submiting a separate RC letter WITH those other amendments.


    I think Jack has posted a blog entry regarding a law firm in NY which usually advocates GF (go forwards), without amending prior years. I guess I am not that knowledgeable in that area as to the reason for why someone would do so (perhaps de minimis income, lack of foreign info, or complete lack of willful characteristics in incorrect prior filings).

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  11. I would agree with both Susanne & Fallingasleepagree that NW conduct is exactly what all of us have been talking about here. The absence of any willful intent, willful blindness or conscious avoidance. The latter two are more of a challenge for the govt to prove so even in an instance where a taxpayer would have very little to prove his nonwillfulness, the absence or dearth of evidence for willful blindness & conscious avoidance would be a determining factor to label a taxpayer nonwillful. The way this is shaping up, then, is to see, in your fact pattern, were you at anytime, willfully blind or consciously avoiding a situation where you WOULD have knowledge of the law. For e.g., if you have always filed a Schedule B of a return, you would have known about the checkbox at the bottom of schedule b, but you never looked at the instructions to find out if that checkbox applied to you. But, "The mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, by itself, to establish that the FBAR violation was attributable to willful blindness.."

    So the govt. needs WAY more to prove willful blindness & conscious avoidance than by just NOT checking a box at the bottom of Schedule B. It's, "a state of mind. It is usually established by drawing a reasonable inference from the available facts. The government may base a determination of willfulness in the failure to file the FBAR on inference from conduct meant to conceal sources of income or other financial information. For FBAR purposes, this could include concealing signature authority, interests in various transactions, and interests in entities transferring cash to foreign banks."

    However, to even PROVE willfulness, the IRS needs a LOT of evidence, enough to convince a jury.

    Check it out here, in 4.26.16.4.5.3 (07-01-2008)
    FBAR Willfulness Penalty - Willfulness

    & 4.26.16.4.5.4 (07-01-2008)

    FBAR Willfulness Penalty - Evidence
    http://www.irs.gov/irm/part4/irm_04-026-016.html

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  12. Jack, would this penalty calculation have anything to do with the FBAR Willfulness Penalty Mitigation Guideline?

    4.26.16.4.6.3 (07-01-2008)
    "Mitigation Levels for Willful FBAR Penalties
    Level IV Willful Violations Occurring After October 22, 2004 - If the maximum account balance to which the violations relate at any time during the calendar year exceeded $1 million, Level IV, the statutory maximum, applies to that account. The Level IV penalty is the statutory maximum applied to each account. It is the greater of $100,000 or 50% of the closing balance in the account as of the last day for filing the FBAR."

    http://www.irs.gov/irm/part4/irm_04-026-016.html

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  13. Milan, I so much appreciate your response. Makes sense. I guess I tend to get confused with so much info to where I cannot see the forest from the trees. Again thanks so so much! And Jack…getting better? Hope so from us all.

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  14. Anon2014R , I have also same question , I think Jack or Milan can answer this question. Are you preparing certification yourself or taking help from somebody? . I am also same in dilemma on whether to prepare certification myself or take a help of somebody. At the same time I am also waiting for some more information on SDOP as many are saying more guideline are expected. I think we need help for drafting certification.

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  15. SSD, I think we covered this already here but again in your case you need a good explanation for not declaring interest ,dividend income for over 10 years from secret offshore accounts and hope it will pass as under the "negligence", "mistake", "inadvertence" category.
    Why are you not paying Jack for his 2 hour consultation ?
    He will give you a reality check how bad , if at all, your facts are.
    You seem still to be stuck between QD with shaky RC letter or SDOP.

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  16. Thanks, I am getting better. Think I'll be up to speed by the end of the week.

    Jack Townsend

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  17. Probably. Essentially, as I read the Level IV, that is not a mitigation guideline, but the full bore application of the maximum nonwillful penalty.

    Jack Townsend

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  18. $1400 will get you 2 hours of Jacks time and peace of mind.... I am afraid the decision will not become easier the longer you wait.

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  19. SKS - I am thinking of preparing the certification myself.. however not sure yet.


    Do you happen to have answer to any of my above questions? i.e. how to handle State Tax liability, how to calculate the Interest on the Tax, and how many pages of NonWillfull explanation should we attach?


    Regards

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  20. Jack,


    If I can share why for a lot South Asian Indians having immigrated from India, might be better off in OVDP rather than a QD or Opt out, especially if they have multiple accounts. Forget the CFC issues for the moment, which I do not see a lot of them having.


    They tend to have accounts at banks which automatically open up revolving CD accounts (known over there as fixed deposits, i.e., "FDs"). It could be a relatively smaller regional bank like "Indian Overseas Bank" or a large nationalized bank (State Bank of India). I guess those banks tend to do this to retain account holders by maxing out their interest income, with possibly the tacit approval or, arguably, without the knowledge of the account holder. (ICICI Bank would be an example of a private Indian bank which does this also).


    I have a case in OVDP where the individual has over 60 accounts over the 8 year period, but his highest balance was only $100K. Most of the accounts were FDs, which either this bank automatically opened & closed, or which his nonresident & Indian citizen mother, who lives in India, opened & closed for her support. This certainly takes away a lot of the active management of a large number of accounts by the taxpayer (since he has records to prove that). It shows almost passive manageent to a smaller number of accounts, most of which were used for the support of a widowed parent. The total income tax from the 8 year period for undeclared interest income was less than $1500, another fact to show (showing that taxpayer did not benefit all that much by undeclared interet income).


    The taxpayer does not want to opt out, but in general, I certainly do not see anything willful by his action pattern in the last 8 years, but the nonwillful penalty could possibly be more than the penalty he has in OVDP (currently at some $30K). Granted, a 3800 warning letter could be issued, but I think the Service could very well hit him with at least 2 years of penalties at a minimum of $20K, or $30K, but at that point, it would be not worthwhile to develop an RC argument to Opt Out, considering OVDP is giving him a 35K penalty, or if he transitions to SDOP, which is in the works, a possibly lower penalty (since 5% on the dec. 31st balances might not be so far away from the 35K penalty on the highest balances).

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  21. Once you prepare and are comfortable with the federal amendments, you SHOULD do the state amendments. Two states I know of have separate OVDP procedures (CA & NJ), or the last time I checked they did. But all states have a federal-state matching program whereby the IRS communicates at some point, any amendments a state's resident would have done with them. So the state will know you increased your AGI, or federal taxable income, so make sure amend the state's return, else they would send you an audit notice. No statute of limitations on this type of assessment since it has to do with income which was not declared.

    For the nonwillful explanation, if you're talking about the explanation page on the NW certification, that's not necessarily asking you for a bullseye reasonable cause. I would be as brief as possible. If you're asking for a RC Opt Out letter, or just a RC letter in a QD setting, I can't say that more is better. It depends how much fact you want to lay out to explain your case.

    For the NW certification, for interest portion, you can calculate it by looking up the IRS interest rates for each quarter of every year. For e.g., for 2007, just google, "irs interest rates 1st quarter 2007", and you'll get this link:

    http://www.irs.gov/uac/No-Change-in-Interest-Rates-for-the-First-Quarter-of-2007

    Similarily, for 2010, fourth quarter, for example, you'll google, "irs interest rates 3rd quarter 2010"

    http://www.irs.gov/uac/Interest-Rates-Remain-the-Same-For-the-Third-Quarter-of-2010



    There might be some quarters you cannot find, so you can, I imagine, use a prior quarter's. The IRS will then correct you and send you a bill for any difference.

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  22. I agree that you should be as brief as possible. Be fair in the presentation, and be prepared to provide details should the IRS ask. But for this presentation be brief.

    Jack Townsend

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  23. Milan,

    Thank you for this blog. I too have found that Asian Indians -- not sure that South has hit my radar screen yet -- tend to have a lot of accounts, which can implicate their exposures for the nonwillful penalty. The IRS claims the right to assert $10,000 per account per year, and with many accounts, the numbers can add up.

    Thanks for addressing the subject.

    Jack Townsend

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  24. Milan what are you talking about again..... 5% SDOP from $100K is $5K and not anywhere near the $20-35K you are talking about in OVDP.

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