by Brian Mahany
Dr. Arvind Ahuja was convicted this week on criminal charges of filing a false tax return and failing to report an offshore account. The charges stem from bank accounts opened by Dr. Ahuja at HSBC India and HSBC Jersey.
Federal law makes it illegal to open a bank or brokerage account in a foreign country unless the account is reported to the IRS. Foreign accounts must be disclosed annually on a Report of Foreign Bank and Financial Accounts form, often called an FBAR. This year, many taxpayers must also report foreign accounts on a FATCA form as well. (FATCA is the acronym for the Foreign Account Tax Compliance Act.)
Failure to properly report a foreign account can subject to the account holder to severe monetary penalties – up to $100,000 per year or 50% of the account value for each year the account was unreported. Willful violations also carry a potential 5 year felony prison sentence.
Ahuja maintained that his failure to report was not willful. According to an Associated Press story, his lawyer said that “failing to check a box on a tax return or attach some arcane form is typically handled as a civil matter.” Evidently the jury disagreed.
This one was one of the few cases that went to trial. Most unreported FBAR cases result in plea bargains.
Of the 7 counts that went to a jury, Ahuja was acquitted of 5 of the 7 charges. Nevertheless, he was convicted of two felony counts and faces 8 years in prison when sentenced. He also still faces huge IRS civil penalties on all of the unreported accounts, even those where the jury acquitted him of more serious criminal charges.
The defense raised a novel argument before trial. Ahuja claims that because HSBC did not send him 1099’s, he didn’t willfully fail to report the interest income on his foreign accounts. Most foreign banks do not issue 1099’s. That doesn’t eliminate the need to report foreign source income, however.
The indictment charging Ahuja claimed that the doctor directed the bank to send statements to an address in India instead of his Wisconsin address. Simply having statements sent somewhere else and not getting 1099’s is not enough to avoid a criminal prosecution.
Ahuja apparently utilized the services of NRI Services, a subsidiary of HSBC bank. The feds claimed that HSBC has assisted Indians and other foreign born taxpayers in opening undeclared bank accounts. U.S. authorities continue to investigate HSBC banks worldwide. The bank has pledged to cooperate in those investigations. That means other taxpayers with unreported accounts are likely to be exposed.
Ahuja’s lawyer has filed post trial motions to vacate the jury verdict. Unless successful in those post trial motions, Dr. Ahuja will likely be sentenced next year.
Holders of unreported offshore accounts risk prison and loss of their entire account if they fail to act quickly. Worldwide, banks must begin reporting U.S. taxpayers that have offshore accounts. Banks are also required to perform due diligence and identify account holders that have some indicia of nexus to the United States. That means having a foreign account titled in the name of some offshore corporation won’t work if there are any U.S. addresses associated with the account.
The IRS is presently offering an amnesty program for holders of unreported accounts (“Offshore Voluntary Disclosure Program,” sometimes referred to as “OVDI” or “OVDP”). The price of participation is high – 27.5% of the highest account balance – but the penalty is only applied to one year instead of each year that the account was unreported. In some very limited instances, the penalties may be even lower. If you believe that you can prove that your failure to report a foreign account was not intentional, you may be better opting out of amnesty and negotiating directly with the IRS. There are no guarantees in such an event but it is possible to avoid all penalties in certain circumstances.
In addition to the amnesty penalty, taxpayers must of course pay any tax due with unreported income (interest or dividends) associated with the account. With today’s low interest rates, the amount of any unpaid taxes is typically quite low.
The time is running out on coming forward and taking advantage of amnesty. If the IRS finds you first or your bank reports you to the IRS under next year’s FATCA rules, all bets are off and you are no longer eligible for the OVDI program.
As you can probably tell, the rules on foreign reporting are changing constantly. If you have an unreported offshore bank account (brokerage accounts too), give us a call. The tax lawyers at Mahany & Ertl have helped many taxpayers and their accountants navigate through the offshore reporting requirements.
For more information, contact attorney Bethany Kroes at or by telephone at (414) 223-0464. All inquiries are protected by the attorney – client privilege and kept in strict confidence. Don’t let what happened to Arvind Ahuja happen to you. One “arcane form” or failing a to check the correct box on a tax return can land you in jail.
Mahany & Ertl – Giving Taxpayer’s A Voice. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota & coming soon, San Francisco, California (tax only). Services available nationwide and worldwide.