A recent Wall Street Journal Article, “Leniency for Offshore Cheats,” by Laura Saunders cited statistics that reveal a discrepancy between sentences handed down in offshore cases versus those dolled out in tax shelter criminal cases.  The article reports:

• The average sentence following an offshore conviction has been less than 15 months.
• 75% of those charged in offshore cases have pleaded guilty.
• Only 50% of the offshore sentences handed down involved jail time.
• The average sentence following tax shelter convictions (over a three-year period) has been 30 months.

Why are offshore tax criminals getting lighter sentences than tax shelter criminals?  The article cites opinions of tax lawyers that cite possible reasons:

• Poor case selection in the early cases brought.
• The possibility that judges have been more lenient because they are taking into consideration the very harsh civil FBAR penalties that have been assessed usually equal to ½ of the highest balance in the account.
• Cooperation provided by the defendants with government investigations of banks and others.
• Perhaps a sentiment among some judges that it is unfair to treat too harshly those with the same culpability as others receiving amnesty in the OVDP programs.

The case of Mary Estelle Curran illustrates both poor case selection and impact of the large FBAR penalty on sentencing.  Curran is a 79-year-old financially unsophisticated grandmother and homemaker who relied on her husband to make their financial decisions. He’d grown a $1 million inheritance left offshore into about $43 million left offshore.  Upon his death Curran was advised by her European bankers to continue the offshore structure.  Later she tried to enter the 2009 OVDP but was rejected as her name was among the initial 250 UBS customers handed over to IRS.  She pleaded guilty, agreed to pay a 22 million FBAR penalty and faced up to 37 months of jail time, although probation was suggested and agreed to by the prosecution.  West Palm Beach U.S. District Judge Kenneth Ryskamp called her prosecution “a tragic situation.”  He sentenced her to one year probation and then immediately revoked the probation. He went further, suggesting that her attorney’s seek a presidential pardon.  Judge Ryskamp further commented, “The government should have used a little more discretion.”

One may write off this case as an aberration, a reflection of poor selection by the government, but other offshore defendants have also received relatively light sentences in relation to possible guidelines sentencing ranges and sentences handed down in tax shelter cases:

• Sybil Nancy Upham received 3 years probation for hiding about $11 million offshore (4/10/13) – The Guidelines sentence range would have been 30 to 37 months. The FBAR penalty to be paid was $5.5 million.
• Michael Canale, a former doctor with the VA, received a 6 months sentence for hiding $1.5 million offshore (4/25/13). The Guideline sentence range would have been 24 to 30 months.

What impact will these sentences have on offshore compliance?

• Some still out in the cold may choose to take their chances figuring the wallop will not be too hard if caught.   Such thinking may be self-deception since few sentences have been handed down.  But, these cases do form a base to argue from. 
• More of those who want to come in from the cold may decide to submit quiet disclosures despite IRS admonitions in all three sets of FAQS (2009, 2011 and 2012) that higher penalties and possible criminal sanctions could come to them.  These are likely to be those with no criminal exposure who can file qualified amended returns to avert the accuracy related penalty and present strong arguments against the draconian willful FBAR penalties. Those who opt for this process are trading certainty in the OVDP for a hoped for result.
• Some may now feel the OVDP is less certain after the DOJ rejected some applicants it had provisionally accepted (clients of Israeli Bank Leumi).  The question raised, Is IRS playing fair?   It would seem that once applicant’s names are cleared they should not be rejected even if IRS finds later that it actually had their names already.  Actions like submitting false or incomplete information may rightfully lead to expulsion, but IRS should not go back on its provisional acceptance when it has made a mistake.  That sort of action is unwise, creating a huge hole of uncertainty about the program.

 All in all, the OVDP for many is still a wise choice.  But, each case stands on its own facts and the initial review of a particular taxpayer’s situation, to decide the proper course to a safe harbor, is the most delicate part of the job faced by a tax lawyer representing offshore clients who want to come in from the cold.

 © 2013 by Robert S. Steinberg, Esquire
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