by Brian Mahany
Our 5th amendment privilege against self – incrimination is a basic fundamental right guaranteed by the Constitution. Americans can trace this protection from government abuse of authority all the way back to 1215 and the Magna Carta. Think of growing up watching TV shows and movies where the cops tell the bad guy that he “has the right to remain silent”. Many of us think that our Constitutional rights are absolute – unfortunately, our right against self-incrimination doesn’t always apply in case involving hidden offshore accounts.
Last summer, the United States Circuit Court of Appeals for the 9th Circuit ruled that the “Required Records” doctrine may supersede the 5th Amendment Constitutional guarantees in offshore tax cases. The decision is a huge blow to Americans with unreported or secret offshore accounts.
In the case captioned, “In Re Grand Jury Investigation M.H.,” the IRS was investigating an individual (“M.H.”) who was thought to have an unreported Swiss bank account at UBS. When IRS agents couldn’t get the information voluntarily from M.H., they issued a Grand Jury subpoena and commanded him to testify and supply documents. His lawyers argued that forcing him to testify or produce the records would force him to incriminate himself.
If he answered truthfully and admitted that he maintained an unreported foreign bank account, such an admission would be direct evidence of a felony. (It is a felony to fail to file an FBAR or Report of Foreign Bank and Financial Account annually with the IRS.) On the other hand, if he lied about the account he could be charged with perjury. In most instances, someone faced with such a dilemma would simply refuse to answer the question on 5th amendment grounds. The court, however, sided with prosecutors and said he must answer.
Under the “required records” doctrine, when certain conditions are met, records required to be maintained by law fall outside the scope of the privilege against self incrimination.
The Fifth Amendment to the United States Constitution states that “[n]o person . . . shall be compelled in any criminal case to be a witness against himself.” Since that time, however, the Supreme Court has carved out exceptions for records that were “voluntarily created” or from voluntary participation in a regulated activity. This exception is known as the “required records” exception.
If this sounds a bit confusing, it is. Let’s look at the analysis applied by the court in M.H.’s case.
If a required document is voluntarily created and kept, compelling its disclosure does not implicate the privilege against self-incrimination. When documents are required to be kept and then produced, they are arguably compelled. If the analysis stopped here, M.H. would not have to produce the offshore bank records. By law, Americans with offshore banks accounts are required to keep and maintain certain records. Compelling the production of the records would require M.H. to incriminate himself. Unfortunately for MH, the analysis does not end there.
The 9th Circuit next looked to see if the records were required because of M.H.’s “voluntary participation in a regulated activity.” In M.H.’s case, although foreign bank records are required to be maintained, M.H.’s decision to move his money offshore was voluntary. Obviously, the “voluntary participation in a regulated activity” creates a very slippery slope for courts. One could easily fashion an argument that prosecutors can compel almost any type of documents using this rationale.
The 9th Circuit attempts in its opinion to safeguard “against the exception swallowing the rule” but we remain skeptical. Without a bright line test, prosecutors can seek to compel defendants to produce documents even though the production of those documents are self incriminating.
While the decision has broad public policy implications, this post is limited to offshore accounts. If you have an unreported offshore account, a grand jury may be able to compel you to produce records about the account – records that can be used to against you in a subsequent criminal proceeding.
Many people with unreported offshore accounts are simply ignorant of the complex reporting requirements. A few may have acted intentionally and are actively trying to hide money from Uncle Sam and the IRS. Fortunately, there is presently an amnesty program that can keep you out of jail and avoid huge civil penalties. The program, called the Offshore Voluntary Disclosure Program or OVDP, replaces a similar IRS initiative from last year called OVDI. Both programs allow taxpayers to avoid audit, pay reduced penalties and avoid criminal prosecution.
If you have an unreported foreign financial or bank account, now is the time to come forward. The government has been playing hardball for the last several years and shows no sign of slowing down in its enforcement efforts. Maintaining an offshore account is completely legal if you comply with the government’s rules. Those rules generally require filing FBARs and this year, also require compliance with the Foreign Account Tax Compliance Act or FATCA. (For more information on these requirements, simply search the term FATCA or FBAR in our blog search engine.)
The tax lawyers at Mahany & Ertl have helped many taxpayers comply with IRS offshore reporting requirements. For more information, contact attorney Brian Mahany at (414) 704-6731 (direct) or by email at All calls are kept in strict confidence and covered by the attorney client privilege.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California (tax only). Services nationwide.