An excellent summary of two recent court cases related to FBAR appeared in Novemeber issue of the New York Law Journal and is available online at the web page of the author, Jeremy H. Temkin.
Fifth Amendment and Government’s War on Offshore Accounts (PDF)
November 10, 2011
New York Law Journal
Under Treasury Department regulations, taxpayers are required to keep records relating to accounts they maintained at foreign financial institutions. Faced with a subpoena for such records, a taxpayer who did not disclose a foreign account on his income tax returns and on FBARs faces a difficult dilemma: producing the records will demonstrate that his previously filed returns were false, while denying that he has the records could subject him to prosecution for failure to keep required records. This article discusses two recent decisions — one out of the Ninth Circuit and one from the United States District Court for the Southern District of Texas — addressing taxpayers’ assertion of their rights under the Fifth Amendment in response to such subpoenas.
In one case, the Ninth Circuit ruled that a person could not withhold their bank records on Fifth Amendment grounds, because of the “required records” exception –which is court-speak for why the United States government doesn’t have to pay attention to the Fifth Amendment. In the second case, Judge Lynn N. Hughes ruled against the government, saying that the foreign account information did not qualify as “required records”. The arguments of Hughes are similar to the ones I made in my response to Roy A. Berg’s comment, which I reproduce here.
Your readers need to be aware that they must exercise EXTREME caution before invoking the 5th Amendment protection against self-incrimination. The argument in the article you cite is quite nuanced and can easily be misconstrued.
The US Supreme Court has said that the 5th Amendment extends only to a taxpayer’s refusal to answer questions in the return, and does NOT constitute reasonable cause sufficient to justify a taxpayer’s refusal to file any return at all. The appropriate case is Garner v. U.S., 424 U.S. 648 (1976).
@Roy Thanks for this excellent response.
Let me understand: By what you are saying, you would prefer that readers of the Isaac Brock Society tacitly waive their constitutional rights by complying with unconstitutional demands of FBAR?
The first thing I would respond is that you refer to Garner. But that of course applies to the tax code. A person cannot refuse to file a tax return on Fifth Amendment grounds. But in what sense is FBAR analogous to a tax return? As you know, the Bank Secrecy Act is not part of the Internal Revenue code and it is aimed at detecting money laundering, criminal tax evasion, and terrorism. If that is the case, every person required to fill out an FBAR has a prima facie Fifth Amendment argument against filling out: If the only reason the government needs the information is to detect a crime, not to collect taxes, then the government is only collecting the information in order to incriminate us. That is the information’s only useful purpose. Thus, we are essentially waiving both our 4th and the 5th amendment rights when filling out the FBAR. Furthermore, since our accounts are in a foreign jurisdiction, we are the most likely ones to incriminate ourselves by filling them out. But now the only crime that we’ve committed is the failure to file, so that the inherent flaw in the FBAR law is the potential criminal penalty itself. It is thus inherently unconstitutional in its demands.
Yeah, sure everyone should be extremely cautious. Perhaps in your view, we should enter the OVDI and just hand over a part of our wealth to government. Or we should fill out the FBARs on a go forward or quiet disclosure basis and thus give the government the ability to assess up to 50% fines and potentially charge us with criminal penalties. I think under these circumstances, my decision to not file FBAR is actually the more cautious route. I rely not only on my Constitutional rights, but upon the protection of the Canadian government in its decision not to collect FBAR fines. Furthermore, now that I am no longer US person, I cannot be expected to file these illegal forms going forward.
I’d like to pull a quote out of article cited above:
Judge Hughes focused on how the government actually uses the records at issue. Rejecting the government’s argument that the requirement that taxpayers keep records was principally regulatory because those records underlie the FBAR reports that purportedly help the government monitor the money supply, Judge Hughes noted that “the government does not manage the money supply or currency flows of the world’s largest economy by annual reports from individual citizens.”
Note that part of the government’s argument to make FBAR information qualify under the “required records” is a make-believe usage of the data to monitor and regulate the money supply. Judge Hughes called them on that issue and said that they only ever use the data for law enforcement. She wrote, “[t]he government instituted the reporting requirement not to regulate its citizens with business abroad but to catch crooks.” Therefore, in the opinion of Judge Hughes, the Fifth Amendment protects the accused from being required to keep and produce records that would be incriminating. Not only is the United States government rapacious, it is also mendacious.
Petros – fantastic research – keep it coming!
I hadn’t understood your argument about this before but now I do – this statement makes it completely clear:
“If the only reason the government needs the information is to detect a crime, not to collect taxes, then the government is only collecting the information in order to incriminate us. That is the information’s only useful purpose”.
I agree with renounceuscitizenship – Brilliant!
This kind of anti-American propaganda we used to hear from American enemies like Cuba, Iran or North Korea. It is sad that Obama administration and IRS commissioner succeeded turning America loving innocent law abiding dual or American citizens living overseas into enemies. Most of the expats are law abiding innocent and only looking for a human way to rectify their innocent mistakes. I am sure most don’t mind paying back-taxes, if they owe any.
Why would the criminals such as terrorists or drug-smugglers declare overseas accounts? And they are in fact protected by 5th amendment. FBAR is unconstitutional to use against real criminals and if they caught why just take 50% instead of 100%. Their crimes are much bigger and go to jail for 100 years. Also over 99% are not citizens of the USA, so such law is useless.
Obama and IRS is holly responsible for turning American loving citizens into American haters, because they are imposing huge un-constitutional penalties by using obscure laws, even tax experts and most in IRS didn’t know they exist until 2009. Even today IRS is not advising expats about FBAR. Countless experts including Miss. Nina Olson and Ambassador to the Canada clearly informed IRS commissioner about this gross injustice, and yet IRS deliberately choose to pursuing such unconstitutional criminal tactics to ruin livers, families and businesses of expats living in countries that are not tax heavens.
Even the IRS web site http://london.usembassy.gov/irs/irsfaq.html didn’t mention about FBAR. Isn’t it reasonable for the IRS to assume that expats living in UK must have bank accounts in UK? Why didn’t IRS informed? If it is a mistake on their part for not informing, it is much smaller mistake on the part of expats to not report bank accounts in the country they have been living.
How hard it is to differentiate between expats and people living in the USA and differentiating between tax-heavens and non-tax-evens? Most of the foolish Americans think, it is OK to ruin lives of few million expats as long as if they can fetch few million or net few thousand Americans who live in the USA and hide money in tax heavens. They are pretending it is impossible to apply such simple logic for determining innocent expats and forgiving huge penalties for innocent law abiding expats. The IRS continuing this policy knowingly and this kind of injustice only hurts the USA in long-term.
@Bharat: Thanks for this comment and some excellent points.
I would take issue with this first statement: “This kind of anti-American propaganda we used to here from American enemies like Cuba, Iran or North Korea. ” Let’s not fall into the trap of the FBI and make those who insist on Constitutional protections are enemies of the state. We are critics, but not enemies. This post is not propoganda, but statement of my opinion, which happens to agree with the Judge Hughes, who is on the payroll of the United States of America. She, at least, is not Castroite, No-Ko or supporter of the Iranian regime.
I want to say this clearly. I am a loyal Canadian. Canada is for now an ally of the United States. I am not at war literally with the IRS. It is a “war” as a metaphor only, and we must use all legal means to achieve our goals. I do believe that this a diplomatic incident and an assault on Canada’s sovereignty (and all the other nations of the world), and hence a casus belli. These are the kinds of stupid actions, if they are not thwarted, eventually lead to armed conflict between states. So we must be diligent and alert and fight at a political level in order to try to stop a more serious problem.
@ Bharat: “The only purpose the FBAR can serve and are targeted at criminal activities. But asking criminals to report bank account activity is unconstitutional.”
And futile, because criminals aren’t filling out any FBARs. On the question of the term aggregate, that you describe, it is accounting fraud by the IRS. http://isaacbrocksociety.ca/2011/12/19/the-term-aggregate-in-irs-speak-is-a-fraud-perpetuated-on-us-persons/
@Petros: Sorry for my poor English and poor choice of words. May be resent is better word than enemies. My mail is target not at the USA but refer to IRS commissioner for pursuing such unfair tactics, even after knowing huge pain it has been causing to honest innocent expats who wants to rectify their unintentional mistakes. All I want to say is that American expats no longer strongest supporters of the USA in the countries they have been living for decades. We are not able to defend the USA, since we are also feel other’s are justified in other’s anti-American feelings. Of course, many countries in the Europe and Asia are alloys of the USA. But many people in those countries don’t like US policies and most expats try to explain and defend the USA. How can duel-citizen expats defend, when they were unjustly persecuted?
Also FBAR is not a tax form or information form, but it is a tool to catch money laundering or criminal activity. The intent of the legislation is to catch criminals. It has nothing to do with information tracking. There is no ambiguity in the intent of the legislators. Hence FBAR is asking criminals to self-incriminate, thus makes it unconstitutional. It has no informational value. For example, a family of 5 barrows 100K and transfers substantial portion of 100K between their 20 accounts 30 times, the FBAR shows balances in 30 bank accounts. It will have zero useful information for tax purposes. Most cases people transfer funds among their accounts. Alternatively they may act as an inter-mediatory in a large business transaction, for a friend or a family friend. Soma cases may get small percent commission. The bank balance serves no useful purpose for taxes. What tax purpose can be served, if I receive US$ one million for selling my father’s house and deposited in my mother’s account next day (assuming my parents were not US citizens and I am guardian and taking care of my old mother). I am sure most Expats many such kind of transactions. Reports for such random events serve no useful purpose for taxes. The only purpose the FBAR can serve and are targeted at criminal activities. But asking criminals to report bank account activity is unconstitutional.
@Petros: Your post proves beyond any doubt that reporting FBAR can serve no useful purpose except for tracking offshore accounts of the criminals. But asking criminals to report offshore accounts is unconstitutional as per the 5th amendment. Also the IRS is applying this law against the congressional intent of the law, which is illegal.
For exapts in poor countries like India, it costs more than 30% of salary to hire a qualified accountant to file a nill return each year. The IRS doesn’t do any cost benefits analysis. According to some estimates, it costs banks 4 times more to be FATCA compliant for estimated gains of 8 billion over 10 years.
The USA lost 20 billion dollar fighter aircraft deal because of using its laws for serving un-intended political purposes. Indian defense experts were delighted when the USA starved Pakistan F16 fleet for spare parts for decades, in order to bring them inline for political purposes. But the same experts were extremely concerned to buy from the USA, because the USA might do the same to India in future during a conflict. Most exapts hard time promoting the US exports, when expats are persecuted for innocent mistakes.
One expat wish to sell US defense hardware to India, but the overwhelming regulations for offering sensitive technology making it impossible. Many laws and regulations are so complex, no one knows what the unintended consequences are until it is tested and settled by the US Supreme Court. For example, the IRS has been struggling to explain FATCA regulation for last two years. It takes many court cases to determine the constitutionality or intent of countless laws or regulations such as FBAR. Only way expats can get around us regulations to sell US hardware is to relinquish US citizenship.
Have you read this one???
Fifth Circuit Falls in Line and Holds Required Records Trumps Fifth Amendment in Offshore Bank Case (9/22/12)
So wonder if this will continue upward to the Supreme Court.?
Don’t forget that the IRS form 8938 was created on a timeline matching the discussion above. If you are saving responsibly and nearing retirement, then form 8938 will apply and the argument returns to the IRS rules. Information gained from FBARs or Qualified intermediaries will be used to nail the coffin shut with 8938 penalties.
According to the article, the Tax Court ruled in favor of the taxpayer’s 5th amendment rights, but such Tax Court decisions are not jurisprudence.
Thanks @Jefferson D. Tomas for following this and updating us.
Glad to see you still posting!