HSBC Client Prosecuted After "Quiet Disclosure"
On May 19, 2011 the Department of Justice released a statement regarding United States v. Michael F. Schiavo, a case where the defendant quietly disclosed a HSBC Bermuda account. The defendant, Michael Schiavo, was a Boston venture capitalist and director at Boston Private Bank and Trust Company. From 2003 to 2008, Mr. Schiavo failed to report his HSBC Bermuda account and $99,273 of income from a partnership that invested in medical devices. As a result, Mr. Schiavo deprived the IRS of $40,624 in taxes.
As stated in our March 2011 blog, each US person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing a Report of Foreign Bank and Financial Accounts (Form TD F 90-22.1 (FBAR)).
On October 6, 2009, Mr. Schiavo made a “quiet disclosure” to report his HSBC Bermuda account. A quiet disclosure occurs when a taxpayer amends or files previous returns and pays related taxes and penalties without notifying the IRS through the Offshore Voluntary Disclosure Initiative or the Internal Revenue Manual Voluntary Disclosure. However, Mr. Schiavo made a partial disclosure and failed to report his income from his partnership on his 2006 return. After a visit from an IRS agent on October 27, 2009, Mr. Schiavo amended his 2006 return to report the undisclosed income.
According to the criminal information and plea agreement, Mr. Schiavo faces up to five years in prison, followed by three years of supervised release and a $250,000 fine. In addition, Mr. Schiavo agreed to pay a civil money penalty of $76,283, half the value of the highest balance of the HSBC Bermuda account for failing to file an FBAR.
The End of Quiet Disclosures?
Under the current Offshore Voluntary Disclosure Initiative Q&A, the IRS does not recommend taxpayers make quiet disclosures and are strongly encouraged to come forward under the OVDI. Taxpayers who make quiet disclosures run the risk of being examined and potentially criminally prosecuted for all applicable years.
Many complaints that surround the 2011 OVDI is that the program is too punitive. In other words, the IRS is “trying to kill a mouse with an elephant gun.” Many people who are beginning to come forward are not willful tax evaders and are just learning about their US tax obligations. The Schiavo case adds another wrinkle, and taxpayers must be aware the risks of not entering the 2011 OVDI. However, it should be noted that Mr. Schiavo did not fully disclose the first time and this may be why the IRS gave Mr. Schiavo such a severe punishment.
