Due Diligence

by Brian Mahany

If you look up In Re Various Grand Jury Subpoenas in the Manhattan federal court’s docket, you won’t find much. Everything is sealed. Everything except Judge William Pauley’s order dated February 19th. In an unusually harsh opinion, Judge Pauley had nothing kind to say about Americans with unreported foreign accounts.

The IRS and Justice Departments attempted to subpoena records of five taxpayers suspected of having unreported offshore accounts. All five resisted saying that producing those records would violate their Constitutional protection against self-incrimination. We have written about this before, that argument simply doesn’t fly.

Judge Pauley began his opinion by quoting from Ben Franklin, “[I]n this world, nothing can said to be certain, except death and taxes.” (Letter of Benjamin Franklin dated November 13, 1789)  The judge continued by adding his own wisdom, “This motion reveals the effort that some individuals will undertake to escape the consequences of Franklin’s unassailable aphorism.”

The Fifth Amendment to the United States Constitution says that no person can be “compelled in any criminal case to be a witness against himself.” Unfortunately, courts routinely say that the privilege is not absolute. Back in 1948, the U.S. Supreme Court carved out an exception called the Required Records doctrine. That exception says the government is allowed to inspect “records it requires an individual to keep as a condition of voluntarily participating in a regulated activity.” The records must also be analogous to a public document.

We readily concede that opening a foreign bank account – or any bank account post 9/11 – has become a highly regulated activity. Where we think the government fails in its argument, however, is in demonstrating that the records (in this case bank account statements) are “public” in nature. The argument should fail, however, every federal appellate court to consider the issue has disagreed and has sided with the government.

Judge Pauley, in the latest decision to address the issue, ruled that “where personal information is compelled in furtherance of a valid regulatory scheme, as is the case here, the information assumes a public aspect.”

We disagree. Unfortunately for taxpayers with unreported foreign accounts, the courts have the final word.

There is a lesson here. When it comes to unreported foreign bank and brokerage accounts, the courts will often stretch their interpretation of the law in order to support the IRS. The Justice Department has become extremely aggressive in its hunt for people hiding money offshore.

While opening a foreign account is entirely legal, not telling the government about the account is illegal. Offshore accounts are reported annually on a Report of Foreign Bank and Financial Accounts or FBAR form. A handful of Americans have intentionally not filed FBARs in an attempt to evade taxes or hide money from Uncle Sam. Most folks with unreported accounts, however, simply don’t understand the foreign reporting requirements. Many have never even heard of an FBAR.

There is an amnesty program available for those with unreported offshore accounts. The IRS has warned that attempting a so called “quiet disclosure” – simply filing the missing back FBARs – will not work.

The amnesty program, called the Offshore Voluntary Disclosure Program or “OVDP”, allows participants to pay limited penalties and avoid audit and possible criminal prosecution. There are other programs that may even offer a better deal. With so many options and the stakes so high (unreported foreign accounts carry a penalty of up to $100,000 or 50% of the highest account balance per each year the account was unreported), getting professional advice is a must.

The tax lawyers at Mahany & Ertl help taxpayers with offshore reporting issues. FBARs, the amnesty program, the new FATCA law and even foreign real estate and gift reporting… we can help. Most cases can be handled for a reasonable flat fee and we stand behind our work including defending you in U.S. Tax Court if necessary.

For more information, contact attorney Bethany Kroes at bckroes@mahanyertl.com or by telephone at (414) 223-0464. All inquiries are protected by the attorney – client privilege and kept in strict confidence.

Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. IRS tax services available worldwide.

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