Light Sentences From Offshore Account Prosecutions Won't Last, Practitioners Predict

Posted in Articles & Publications on May 5, 2011 | Share

Practitioners are offering relatively consistent interpretations of sentences resulting from an ongoing series of Justice Department foreign bank account reporting prosecutions against taxpayers with unreported offshore accounts, agreeing the sentences are light.

The Justice Department, as part of its offshore compliance initiative, has successfully prosecuted seven former UBS AG clients in the U.S. for attempted tax evasion through the use of their accounts since UBS acquiesced to a deferred prosecution agreement in February 2009. That agreement included a $780 million fine and the disclosure of roughly 250 client accounts. Among them are those of Jeffrey Chatfield of San Diego, who was sentenced in March to three years probation after he was found to have filed false tax returns for 2000 through 2008 (on which he failed to report interest in or signature authority over accounts he held with UBS), and Ernest Vogliano of New York, who was sentenced April 21 to two years of probation and assessed just over $950,000 in fines and penalties for filing false tax returns and conspiring to hide $4.9 million in accounts at the Swiss bank. All seven of the defendants escaped jail time, with most sentences consisting of probation, home confinement, supervised release, or fines. (For a DOJ release on the Chatfield case, see Doc 2011-5393  or 2011 TNT 50-34 . For prior coverage of the Vogliano case, see Doc 2011-8745  or 2011 TNT 79-3 .)

Those sentences contrast with outcomes for other tax cheats, including James and Theresa DeMuro of Bridgewater, N.J. The DeMuros were convicted last November of conspiracy to defraud the U.S. and willfully failing to pay over employment taxes. Each spouse was sentenced to 51 months in prison, followed by three years supervised release, and they were ordered to pay the IRS restitution of $1,337,952.(For a DOJ release on the DeMuro case, see Doc 2011-6054  or 2011 TNT 56-27 .)

Kevin E. Thorn, managing partner of the Thorn Law Group, a tax litigation firm based in Washington, said he is surprised that the foreign bank clients prosecuted under the FBAR regime thus far have received such light sentences. He contended, however, that taxpayers who fail to come forward under the IRS's new offshore voluntary disclosure initiative (OVDI) won't fare as well. The program, launched February 8 and running through August 31, allows taxpayers a second chance to disclose previously unreported offshore accounts to the IRS .

The IRS's earlier initiative, the offshore voluntary disclosure program, which ended on October 15, 2009, after nearly seven months, resulted in approximately 15,000 disclosures. Given the success of that program, the IRS determined that a similar initiative should be made available to the large number of taxpayers with offshore accounts and assets who applied to the IRS Criminal Investigation's traditional voluntary disclosure practice after the October 15 deadline. (For prior coverage, see Doc 2011-5827  or 2011 TNT 54-4.)

The key feature of the new OVDI is a 25 percent penalty that will be levied on the highest aggregate amount in a participant's foreign bank account between 2003 and 2010. The penalty represents an increase of 5 percentage points from what was offered under the 2009 program. (For prior coverage, see Doc 2011-2714  or 2011 TNT 27-1 .)

Thorn says he expects much stronger sentences and other penalties for those who continue to hide offshore accounts, noting that the pressure on taxpayers with undisclosed accounts will only intensify as the government gets more information from banks and other taxpayers.

What the Statistics Show

The DOJ Tax Division Web page says its prosecution results to date are encouraging. According to the site, approximately 150 grand jury investigations of offshore banking clients have been initiated, with 30 clients charged, 24 guilty pleas, two convictions, and four pending trials. A number of facilitators who helped clients hide assets offshore at UBS and other banks have also been indicted, resulting in 10 bankers and two attorneys being charged and awaiting trial and an adviser being charged and convicted. Also, grand jury investigations have been opened into eight additional offshore banks across the world.

The DOJ contends, however, that the success of its undertakings "can't be measured in litigation results alone," adding that its enforcement efforts have "dealt fabled Swiss bank secrecy a devastating blow and provided tools that should yield information on thousands of additional U.S. offshore account holders who have undisclosed accounts at UBS and other banks." The agency cites the publicity surrounding its enforcement actions and the subsequent settlement for dramatic behavior changes.

According to the DOJ website, the IRS credits the deferred prosecution agreement the Tax Division negotiated with UBS in 2009 and another agreement negotiated that year among the U.S., UBS, and Swiss government for "prompting almost 18,000 [clients] in the 18-month period ending in February 2011 to 'come in from the cold'" by voluntarily disclosing to the IRS their hidden accounts and agreeing to pay hundreds of millions of dollars to the U.S. Treasury. The DOJ adds that a number of European countries, "buoyed by our success in the United States . . . have pressed Switzerland to provide similar account information for their nationals." (For prior coverage, see Doc 2009-3640  or 2009 TNT 31-1 .)

For more information on these developments and offshore tax issues, please contact Kevin E. Thorn, Managing Partner at the Thorn Law Group, PLLC, 888 16th Street, NW, Suite 800, Washington D.C., Telephone: 1.202.349.4033, Email:

Thorn Law Group

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