by Brian Mahany
The 5th Circuit of Appeals recently handed the IRS and Department of Justice a major victory in their quest to ferret out unreported foreign financial accounts. The court ruled that notwithstanding the 5th Amendment privilege against self-incrimination, a Grand Jury could compel a person to turn over records of their foreign accounts. The 5th Circuit now joins the 7th and 9th Circuits in ruling for the government.
The 5th Amendment of the United States Constitution protects all Americans against self incrimination. It says in part, “No person… shall be compelled in any criminal case to be a witness against himself.” Most people know this provision as one’s “Miranda rights” or right to remian silent.
Even though rooted in the Bill of Rights to the United States Constitution, the U.S. Supreme Court has long ruled that the government can compel inspection of records it requires people to keep as a condition of voluntarily participating in a regulated activity. Because opening a foreign account is a voluntarily activity, the government can require certain records be kept and produced for inspection. This doctrine is called the “Required Records Doctrine.”
Although the taxpayer in the 5th Circuit isn’t identified, presumably turning over those records would immediately implicate the taxpayer in a felony. Owning a foreign account isn’t illegal but not reporting the account annually on a Report of Foreign Bank and Financial Accounts form (FBAR) is a felony.
The trial court initially ruled for the taxpayer, however a three judge appeals unanimously disagreed. The government is now “three and o” in the federal courts of appeals. No appeals court has yet to rule in favor of taxpayers. The appellate panel ruled that even though producing the required records might well be tantamount to confessing to a crime, the purpose of the federal Bank Secrecy Act (BSA) is essentially regulatory and not criminal. (The trial judge said the BSA’s record keeping requirements” are but smoke and mirrors for [the government’s] real concern: crime.”)
We agree with the trial judge’s assessment but are not surprised by the appeals decision. In recent years prosecutors have been actively prosecuting those taxpayers that failed to file FBARs.
To reach its decision, the appellate judges had to really stretch at times. For example, the third prong of the Required Records Doctrine test says that the records at issue must have assumed “public aspects” analogous to public records. We think the judges particularly missed the mark on that part of the test. In our opinion, one’s personal bank records are certainly not public.
Forcing a taxpayer to respond to a records subpoena results in a Hobson’s choice. Comply and risk a felony prosecution for failure to file an FBAR form or refuse and go directly to jail for contempt.
Holders of unreported foreign bank accounts fall into two categories; those who are deliberately hiding money from Uncle Sam and those who simply don’t understand the law. Many of our clients are extremely bright, educated people – doctors, engineers and computer programmers. Many were also born outside the U.S., are dual nationals and pay taxes in two countries or are Americans who long ago retired outside the U.S. Often these folks simply have no idea that foreign accounts must be reported each year to the IRS. (Foreign financial accounts include bank accounts, brokerage accounts, CD’s, foreign hedge funds and even certain insurance products.)
The bottom line is that if you have an unreported account, speak with a tax lawyer specializing in foreign reporting requirements immediately. The IRS is offering a tax amnesty program called the “Offshore Voluntary Disclosure Program” which can eliminates an audit and a criminal prosecution. But time is running out. With so many disclosure options available, a good lawyer is a must.
Whatever option you decide, doing nothing exposes you to potentially exorbitant civil penalties of $100,000 or 50% of the high account balance for each year an account is unreported.
(For a more thorough discussion of the Required Records Doctrine, please click here for our earlier post following the 9th Circuit decision back in February.)
The tax lawyers at Mahany & Ertl have helped many people with a wide variety of offshore reporting issues. We also represent hedge funds and companies coin business overseas. FATCA compliance, unfiled FBARS, foreign real estate transactions and offshore account issues are some of the many tax matters we handle. The CPAmerica organization of accounting firms has named us their exclusive legal services provider for foreign tax reporting issues.
For more information, contact attorney Bethany Kroes at 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 coming soon, San Francisco, California (tax only). Services available worldwide.