A recent decision of the Third Circuit Court of Appeals illustrates the futility of expecting that the Fifth Amendment Privilege Against Self-incrimination will shield taxpayers from production of offshore financial records. The trial court was asked to protect a U.S. taxpayer from enforcement of an IRS Summons for production of offshore account document. The trial court held in favor of the IRS and ordered the taxpayer to appear and produce the records. The Third Circuit upheld the trial court, stating:
“In Shapiro v. United States, the Supreme Court first articulated the required records exception to the Fifth Amendment privilege. 335 U.S. 1, 32-33 (1948); In re Grand Jury Subpoena Dated Feb. 2, 2012, 741 F.3d 339, 344 (2d Cir. 2013) (hereinafter “Doe”). When Shapiro was decided, private papers were entitled to Fifth Amendment protection based on their private status. See 335 U.S. at 33-34. Public papers, however, did not have Fifth Amendment protection. See id. at 5. In Shapiro, the Supreme Court qualified this distinction when it held that the Fifth Amendment privilege did not apply to certain private papers that the law required a person to keep. Id. at 33. The Supreme Court subsequently fleshed out Shapiro’s holding in Grosso v. United States, wherein it explained that the following three prongs must be met in order for records to fall within the “required records” exception: (1) the reporting or recordkeeping scheme must have an essentially regulatory purpose; (2) a person must customarily keep the records that the scheme requires him to keep; and (3) the records must have “public aspects.” 390 U.S. 62, 67-68 (1968)”
The proliferation of Information Exchange Agreements between the U.S. and numerous foreign governments and foreign financial instituios as part of the Foreign Account Tax Copliance Act (“FATCA”) is undoubtedly going to lead to a significant increase in enforcemnt actions by the IRS and DOJ. In those enforcemnt actions taxpayers will have the opportunity to challenge asertions of “”willful failure to file an FBAR”. In challenging “willful” civil penalty assessments (which under the Bank Secrecy Act are the greater of $100,00 of 50% of the highest annual balance) some taxpayers may plan on asserting the Fifth Amendment Priviliege to preclude the government from obtaining the taxpayer’s records. Six circuit courts of appeal and the U.S. Supreme Court have determined that approach will not work.
What may work is timely coming forward through one of the voluntary disclosure mechanisms. If the taxpayer and counsel believe that the taxpayer’s conduct was truly non-willful then the use of the Delinquent Filing Program or Streamline Procedures may be appropriate. IF there is doubt about the whether the taxpayers conduct was willful then the Offshore Voluntary Disclosure Program (OVDP) should be used. Regardless of which method is needed to used ALL U.S. taxpayers with undisclosed foreign financial accounts should come forward rather than wait to be found and rely on inapplicable defenses.