We’ve all seen Matlock reruns, haven’t we? We all sat through a civics class in high school, didn’t we? So we all know what the Fifth Amendment is, right? Therefore, is there any reason at all to finish this article?
Before we can begin to understand how the Fifth Amendment applies in offshore tax cases, we must first understand why such a provision is in the Constitution in the first place. Most of us cannot relate to confessions extracted by torture (Kylo Ren’s interrogation of Poe Dameron in The Force Awakens is in something of a gray area). But for the people who voted to ratify the Constitution in the late 1780s, torture and involuntary confessions were a big deal. Many of their great-grandfathers and great-grandmothers left England largely because of this issue. As late as the mid-17th century, English officials often forced prisoners to take ex officio mero oaths before they even knew the nature of the charges against them, and they then proceeded to take whatever information they needed by whatever means at their disposal. “Freeborn” John Lilburne famously refused to take such an oath in 1637, after his conviction for the heinous crime of publishing an unlicensed newspaper and subsequent refusal to rat out his fellow Puritans. His stance helped inspire other dissidents to present The Humble Petition of Many Thousands to the English Parliament in 1647, and much of that document later worked its way into the Declaration of Independence, the Constitution, and the Bill of Rights.
The Fifth Amendment and Documentary Evidence
As a result of all this, the Fifth Amendment is normally associated with criminal proceedings and the prohibition against self-incriminating testimony. However, the Fifth Amendment is a little broader than that. Its protections also apply in some pseudo-criminal matters, such as contempt of Congress. More importantly for tax law purposes, there is a documentary production privilege, and there is a trio of cases that flesh out this concept.
In Fisher v. United States (1976), two revenuers interviewed two taxpayers regarding irregularities in their income tax returns, and the agents followed up with document subpoenas. As a brief aside, such a tactic is very common in these offshore tax cases. Many times, the agents essentially receive tips from foreign banks about possible FATCA noncompliance, and to make criminal cases, they need much more evidence than the incomplete (and possibly inaccurate) information that these financial institutions provide.
Back to Fisher. After receiving the subpoenas and assembling the requested documents, the taxpayers immediately turned everything over to their attorneys. Now things get complicated. The taxpayers refused to turn over the documents, raising a number of defenses in the process, including the privilege against self-incrimination. Ultimately, the court discarded essentially everything other than the Fifth Amendment claim. One appeals court held that the privilege didn’t apply, but another one ruled that the taxpayers had “a legitimate expectation of privacy with regard to the materials,” and that expectation was enough to trigger Fifth Amendment protection.
In a unanimous opinion from Justice Byron White, the Court refused to “cut the Fifth Amendment completely loose from the moorings of its language, and make it serve as a general protector of privacy.” However, the decision left the door open for future Fifth Amendment application in tax cases. The act of producing the documents, irrespective of their content, can be considered testimonial, thus meeting the threshold Fifth Amendment inquiry. And, if this testimony (an admission that the requested documents exist) is critical to the prosecutor’s case and not merely “a foregone conclusion [that] adds little or nothing to the sum total of the Government’s information,” the privilege may attach.
The plot thickens with United States v. Hubbell (2000), the somewhat infamous Whitewater case. In 1996, independent prosecutor Kenneth Starr served a subpoena duces tecum on former Arkansas lawyer “Webb” Hubbell, ordering Mr. Hubbell to bring documents before a Little Rock grand jury. He subsequently refused to testify about the documents or even acknowledge whether or not they existed, citing his Fifth Amendment rights. The district court threw out the subpoena as a “quintessential fishing expedition,” but an appeals court later reinstated it.
In a near-unanimous opinion, Justice John Paul Stevens essentially extended Fisher. Once again, he focused on the production aspect as akin to testimony, likening it to a prisoner forced to try on a shirt in order to link him with a prior criminal act. “The ‘compelled testimony’ that is relevant in this case is not to be found in the contents of the documents produced in response to the subpoena. It is, rather, the testimony inherent in the act of producing those documents,” he explained. Furthermore, unlike the facts in Fisher, Prosecutor Starr would have had absolutely no case against Mr. Hubbell unless he had access to the withheld documents. “In sum, we have no doubt that the constitutional privilege against self-incrimination protects the target of a grand jury investigation from being compelled to answer questions designed to elicit information about the existence of sources of potentially incriminating evidence,” he concluded.
The Bank Secrecy Act
How does all this apply to foreign bank account records? The BSA requires taxpayers to keep the last five years of bank account records, including owner name, account type, account balance, and other critical information, so based solely on Hubbell’s document significance test, the Fifth would seem to apply.
But hold on a minute. The Fifth Amendment only protects individuals from compelled testimony, so there’s a required records exception. In 2011, the Ninth Circuit specifically held that the required records exception renders the Fifth Amendment defense useless in BSA cases. Most all circuits agree with this posture.
But once again, hold on a minute. Last summer, the Second Circuit decided United States v. Greenfield. In 2013, the IRS demanded information on “every account over which Steven Greenfield had signature authority. . .during the years 2001 through 2011.” Even mathematically and linguistically challenged readers can surmise that such a request goes well beyond the five-year foreign account BSA records requirement. As a result, the court concluded that turning over anything other than the narrow set of documents covered by the required records exception violated Mr. Greenfield’s Fifth Amendment rights.
Greenfield is essentially paydirt. Assume the Service orders Terry Taxpayer to turn over “all documents related to such-and-such” under the guise of a BSA Information Document Request. In addition to incredibly broad, the subpoena language is also very vague as to what the Service does and does not already have. Attorneys should also plead the Fifth and cite Greenfield during IRS interviews if the agents assert that they have third-party information that links your client to criminal activity, they only need a few documents to “fill in the blanks,” and they refuse to disclose anything about these purported documents in their possession. Finally, the privilege probably applies if the agents want your client to produce old information they can apply to current penalties.
This is serious business. Even in the wake of Greenfield, the law is incredibly unsettled, the IRS is doggedly determined to catch “tax cheats,” and a Fifth Amendment defense may be the only thing keeping your client out of prison. When the Service starts asking questions that have rather unsettling answers, it is best to speak to an attorney. Once the bell has been rung, it cannot be unrung.
One Response
Really interesting analysis. Thanks for sharing.
I must admit, however, I hope I never need to raise a 5th Am defense for a client. It is too easy to over-report.
I wonder if there will be any change in the disposition of Treasury/IRS on offshore banking and FATCA. The last administration was very aggressive on these and as a result went too far making it very difficult for Americans to do business globally and to live abroad.