The United States Department of Justice has announced that it has reached a plea agreement in a criminal charge against a bank director who voluntarily disclosed hidden offshore income without taking advantage of the IRS’s Offshore Voluntary Disclosure Initiative (OVDI).

Every U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, 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 or before June 30 of the succeeding year. These accounts include 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.

In 2009, the IRS announced a settlement offer for those who voluntarily disclosed unreported offshore income for 2003-2008. The terms of the 2009 OVDI required payment of back taxes and interest for six years, as well as either an accuracy or delinquency penalty on all six years. There was also a penalty of 20 percent of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value. Those who came forward on a timely basis did not face criminal prosecution. The original deadline of Sept. 23, 2009, was extended to Oct. 15, 2009.

In February 2011, the IRS announced a second OVDI offer for those with undisclosed income from hidden offshore accounts for the 2003-2010 period. The terms of the offer are similar to those that applied for the first settlement offer, but the penalty structure is different. The general rule is that the penalty is 25 percent based on amounts in foreign bank accounts, but it can be as low as 12.5 percent or 5 percent in some situations.

According to a criminal information document filed in the U.S. District Court for the District of Massachusetts, Michael Schiavo, a Boston bank director, failed to report his interest in offshore accounts for the 2003 through 2008 tax years.

On Oct. 6, 2009, Schiavo filed FBARs and amended tax returns for the 2003-2008 tax years. He did not participate in the 2009 OVDI, although his disclosure was made nine days prior to the end of the amnesty period. In his disclosure, he revealed to the IRS that he had an interest in an account in Bermuda but failed to report his income on his 2006 tax return. After an IRS special agent attempted to interview Schiavo, he prepared and executed a second amended return for the 2006 year in which he reported the income.

According to the Justice Department, a plea agreement has been reached under which Schiavo agreed to pay a civil monetary penalty of 50 percent of the highest balance in the offshore account for failing to file the FBAR. He faces up to five years in prison, followed by three years of supervised release and a $250,000 fine.

The IRS warns that a voluntary disclosure without using the OVDI process can result in criminal prosecution.