Ashvin Desai is probably best known for inventing and manufacturing medical devices. Now he will known as the most recent American taxpayer sent to prison for having failed to report offshore bank accounts and file FBAR forms. Desai was sentenced last week to 6 months of prison followed by 6 months of house arrest.
Desai was indicted in November of 2011 and charged with three counts of tax evasion, two counts of filing false tax returns and three counts of failing to file FBARs. An FBAR is a Report of Foreign Bank and Financial Accounts. FBARs must be filed in each year in which a taxpayer has more than $10,000 in foreign bank and other financial accounts. All 8 counts relate to unreported bank accounts at HSBC Bank.
Unlike most criminal tax defendants, Desai elected to take his case to trial. He was convicted last November of all counts. Last week he was sentenced in a San Jose, California federal court.
The jury found that Desai failed to file FBARs for accounts he and has family maintained at HSBC Bank. The accounts were located at HSBC India and in Dubai. They also found that Desai failed to disclose more than $1.2 million in interest income generated by these accounts between 2007 and 2009.
Prosecutors were able to prove that Desai hid the foreign accounts through an elaborate scheme including the use of undeclared accounts in Singapore and the United Kingdom and by using family members living in India. He also told his bankers not to mail statements to the U.S. When statements continued to come to his house, Desai emailed the bank and asked, “Why are all these statements coming to Home address? I though we had a different arrangement.”
On at least once occasion, Desai also told a customer to wire funds directly to his undeclared HSBC India account.
Prosecutors say that between 2007 and 2009, Desai reported and paid just $17,000 in taxes. They say, however, that he owed an additional $357,783 in taxes based largely on his unreported interest income.
If the 12 months of prison and home confinement are not enough, Desai was also ordered to pay FBAR penalties of $14,229,744.
Why so much? Congress increased the FBAR penalty laws several years ago to provide for a civil penalty of the greater of $100,000 or 50% of the highest account balance for each unreported account. In criminal cases, the IRS has begun to assess multiple penalties; one for each year an account was not reported. We have questioned the constitutionality of these penalties in purely civil cases but predict the courts will uphold such huge penalties in criminal cases.
What are the take aways from this case?
First, the IRS has become extremely adept at finding unreported offshore accounts. While few people are criminally prosecuted, the IRS considers elaborate schemes to launder or conceal money to be an affirmative act of evasion. Ditto for emails to bankers asking that statements not be mailed to the United States or having customers wire money to an overseas account. There were so many potential affirmative acts of evasion and the ratio of what was hidden compared to what was reported so great that we are not surprised by Desai’s indictment.
By our calculation, Desai only “saved” $357,783 by not reporting his HSBC India and HSBC Dubai accounts and the interest income from those accounts. Those actions, however, have left him a convicted felon, resulted in a prison sentence and will now cost almost $15 million in tax and penalties.
The effort seems hardly worth it.
HSBC globally as well as HSBC India are known to be cooperating with both the IRS and U.S. Department of Justice. If you have an unreported foreign account at HSBC or any other bank, time is quickly running out. New rules announced by the IRS for their offshore amnesty program – called the 2014 Offshore Voluntary Disclosure Program – make eligibility difficult for those who have accounts at banks known to be cooperating.
If you have an unreported offshore account, speak to a qualified tax lawyer, CPA or expat tax service immediately. Think you may have criminal exposure? Speak with a lawyer.
Mahany & Ertl is a full service boutique tax law firm. We have a nationwide practice and handle IRS cases anywhere in the world. For more information or a confidential, no cost review of your case, contact attorney Bethany Canfield at or by telephone at (414) 223-0464.