In what is becoming an increasingly used attack vehicle, the Department of Justice (DoJ) is using the “required records doctrine” to compel taxpayer’s to produce what may be incriminating evidence of ownership or control of foreign financial accounts. The DoJ process involves the issuance of a Grand Jury subpoena for records and then compelled testimony. A case now on petition to the U.S. Supreme Court is illustrative of the governments’ position.
“Pursuant to 31 C.F.R. § 103.32, all U.S. holders of foreign bank accounts are required to create and retain certain records regarding those accounts for a period of five years. Those who willfully fail to retain such records may be criminally prosecuted under 31 U.S.C. § 5322(a).”
In the case, M.H. v. U.S., the Ninth Circuit Court of Appeals upheld the decision of the District Court that the “required records doctrine” was essentially regulatory in purpose and therefore the production of documents and testimony about the documents or absence of documents was not subject to Fifth Amendment Privileges against self incrimination. So where does that leave taxpayers with unreported offshore accounts?
If a taxpayer has ownership or control over an undeclared foreign financial account and the IRS or DOJ have not initiated audits or investigations that include the taxpayer the taxpayer can still come forward through the Offshore Voluntary Disclosure Program (OVDP). If however there is an investigation or audit already in process then the taxpayer needs to be prepared with a truthful explanation about why he/she does or does not have records and why the accounts are not reported. In some cases, like James, a recent trial court case out of Florida, the taxpayer reasonably relied on his accountant in not declaring a foreign account on his income tax return and not filing a Report of Foreign Bank Account, (FBAR) for the years in question.
“Reasonable reliance” is a defense to penalty assertion and has technical requirements which must be met for the defense to apply. Reasonable reliance is not a bar to compelled document production under the “Required Records Doctrine” and/or appearance before a grand jury and is not part of the Fifth Amendment process. Because the accountant or professional who was consulted may be called to appear before the grand jury on or interviewed in the audit, it is absolutely critical that any statement made or document produced be truthful and accurate. An intentional error may be viewed as an act of “obstruction”, separately punishable.
When all aspects of the case are analyzed and a decision to come forward and enter the OVDP are weighed one final note needs to be considered. If the taxpayer does have undeclared foreign accounts and refuses to come forward after being properly advised, their conduct is very likely to be deemed “willful” and subject them to prosecution, and the “willfulness” penalties of the greater $100,000 or 50% of the highest account balance per year for up to 6 years, plus tax, interest and a 75% fraud penalty on the tax on the unreported foreign income.
Coming forward may be the best approach and is certainly better than waiting to be called as a witness before a Grand Jury. Taking chances and not coming forward if you control an offshore account is like the line from Forrest Gump
“Mama always said life was like a box of chocolates. You never know what you’re gonna get.”