Death, Taxes and Offshore Accounts

March 2, 2013

by Brian Mahany

The Fifth Amendment to the Constitution used to protect us from self-incrimination.  When it comes to the IRS collecting taxes, your offshore financial documents are exempt from such protection.

If you look up a court case titled 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 offshore accounts. His opinion also hammers yet another nail into the coffin of the U.S. Constitution.

To understand the gravity of the court’s decision, a little background about this case is necessary. The IRS and Justice Departments attempted to subpoena records of five taxpayers suspected of having unreported offshore accounts. All five resisted saying producing them would violate their Constitutional protection against self-incrimination.  The Fifth Amendment to the United States Constitution says no person can be “compelled in any criminal case to be a witness against himself.” Failing to report an offshore bank or financial account is a felony. The five individuals said by producing the requested records, they would be incriminating themselves.

Once upon a time, the Constitution mattered. It was the preeminent law of the land. Now, politically appointed judges have become the law of the land. One of their victims is the 5th Amendment’s guarantee against self incrimination. Unfortunately, since World War II, the courts have eroded that privilege and declared it is not absolute.

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.  Whether or not we agree with the Supreme Court, most folks will readily concede that opening an offshore bank account – or any bank account post 9/11 – has become a highly regulated activity. No one, however, would consider one’s personal bank statements to be “public” in nature. Right? Wrong! Every federal appellate court to consider the issue has sided with the government.

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.” Judge Pauley, in the latest decision to address the issue, ruled “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. That’s judicial doublespeak but unfortunately for taxpayers with unreported foreign accounts, the courts have the final word.

The Supreme Court has the ability to correct these wrongs and protect the Constitution but to date has not intervened in any of these “required records” cases. That means the IRS can compel you under penalty of perjury (jail) to produce incriminating records.  Taxpayers now face a difficult dilemma. Produce the requested records and face indictment for having an unreported account or refuse and go directly to jail for contempt. We hardly believe that this is the system of government the framers of our Constitution had in mind.

Most of the clients we meet are not trying to evade taxes. They are hard working people trying to maintain privacy or simply investing overseas out of distrust of the American banking system. In all but two countries, offshore income doesn’t have to be reported so foreign born Americans often have no idea that their accounts “at home” must be reported to Uncle Sam. Ditto for the millions of Americans now living in Canada, Mexico and Europe.

There is a lesson here. When it comes to unreported offshore 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.  At this late date, if you have unreported accounts your options are extremely limited. One option is to leave the country and renounce your citizenship (not always that easy if the IRS says you owe taxes) or come into compliance.

There is an amnesty program available for those with unreported offshore accounts. Trying to avoid amnesty or some other direct disclosure by simply filing any missing returns is unfortunately not an option. The IRS has warned that attempting a so called “quiet disclosure” 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. If your failure to report an offshore account was willful, amnesty offers the best option. Although there are monetary penalties, the penalties are much lower than normal and you avoid prosecution and prison. If the failure to report was accidental, a good tax attorney may be able to help you with an “opt out” and avoid all or most penalties.

With so many options and the stakes so high (unreported offshore accounts carry a civil 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. Unfortunately, doing nothing is no longer an option.

About the author. Brian Mahany is a friend of Global Wealth Production and a tax lawyer with offices throughout the United States. He has been involved in some of the largest criminal tax trials in the U.S. Brian’s practice is limited to tax and fraud matters and he welcomes questions and comments. Brian can be reached at [email protected] or by telephone at (414) 704-6731. All inquiries are protected by the attorney – client privilege and kept in strict confidence.