‘Required Records’ Decision Erodes Taxpayers’ Fifth Amendment Rights

by Matthew D. Lee and Jed Silversmith

The Legal Intelligencer

Few rights are more sacrosanct than the constitutional privilege against self-incrimination. This right extends beyond making statements to police or testifying in court, but also to the act of producing records. This means that if an individual is subpoenaed to produce records, he does not need to do so if he can establish that the act of production would be an implicit representation that would incriminate himself. In short, it is not simply an individual’s words that can be used to incriminate himself, but also the mere possession of documents.

In the last four years, the federal courts of appeal have begun to peel back this inviolable privilege in the realm of foreign bank account reporting. The U.S. Court of Appeals for the Third Circuit has now joined six other circuit courts to hold that an individual may not assert Fifth Amendment “act of production” immunity in response to a request for his or her foreign bank account records. In United States v. Chabot, No. 14-4465 (3d Cir. Jul. 15, 2015), the Third Circuit joined the unanimous chorus of circuit courts to hold that the production of foreign bank account records is not protected by the Fifth Amendment because federal law requires that a taxpayer maintain such account records.

In Chabot, the taxpayers received a civil summons from the IRS demanding production of bank account records for an account at HSBC Bank. The Chabots refused to produce records, citing their Fifth Amendment rights. In response, the IRS filed a civil action in federal district court seeking to enforce the summons. Affirming the district court’s decision enforcing the summons, the Third Circuit concluded that records of a foreign bank account were “required records” and therefore the Fifth Amendment did not apply.

Foreign bank account reporting is a hot area of civil and criminal tax enforcement for the IRS and the Department of Justice since 2009, as a result of the landmark deferred prosecution agreement the United States reached with Switzerland’s largest bank, UBS AG, that year. Under the federal Bank Secrecy Act, which was enacted in 1970, every “resident or citizen of the United States or a person in, and doing business in, the United States” is required to keep records and file reports about transactions with foreign financial institutions. U.S. taxpayers are required to file these reports on a FinCEN Form 114, commonly referred to as an “FBAR,” annually.

Failure to file the FBAR form carries draconian civil penalties: 50 percent of the highest balance in the unreported bank account each year. The IRS, the agency charged with enforcement, is permitted a six-year look-back period, meaning that it may impose a penalty equal to three times the balance of the account (in other words, 50 percent of the account for each of six years). This is not an idle threat. Last year, a jury upheld a three-year, 150 percent penalty against a Florida man who had failed to disclose his Swiss bank account worth about $1.5 million.

Individuals who willfully fail to file an FBAR can be prosecuted criminally as well, carrying a statutory maximum of five years’ incarceration for each year that a taxpayer did not file. In addition to the failure-to-file penalty, the federal individual income tax return (Form 1040) asks taxpayers if they have an overseas bank account on Schedule B. The DOJ, as part of its offshore initiative, has prosecuted a number of taxpayers who failed to check “yes” in response to this question. This misstatement, which has no impact on a taxpayer’s tax liability, is still a felony.

Given that the disclosure of foreign bank account information carries both significant civil penalties and the very real threat of criminal prosecution, production of these records in response to subpoenas or summonses is not an abstract concern. Other than the Third Circuit’s decision in Chabot, every other “required records” decision involved enforcement of a grand jury subpoena.

The courts of appeals that have ordered the production of these documents have relied on the “required records doctrine.” The courts note the Bank Secrecy Act requires that a taxpayer maintain bank account records for a period of five years. Therefore, it is a “required” record, and the taxpayer cannot avoid producing it.

The required records doctrine first appeared in Shapiro v. United States, 335 U.S. 1, 32–33 (1948), which involved a merchant who was engaged in improper sales in violation of the Price Control Act during the early 1940s. The Supreme Court held that Shapiro had to produce records pertaining to the sales because such records were public papers as they were required to be kept by the Price Control Act. At that time, “private papers” were entitled to Fifth Amendment protection based on their private status but public papers were not.

The U.S. Supreme Court subsequently fleshed out Shapiro‘s holding in Grosso v. United States, 390 U.S. 62, 67–68 (1968), in 1968. In Grosso, the court set out three elements of 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.”

In recent years, Shapiro has been applied sparingly. Baltimore City Department of Social Services v. Bouknight, 493 U.S. 549, 555–56 (1990), a 1990 decision, involved a mother who was suspected of child abuse but was given custody of her injured child with extensive conditions imposed by a protective order. The mother violated those conditions, and a court ordered her to produce the child in order to verify that the child was alive and well. When she refused, the court held her in contempt and rejected her contention that the Fifth Amendment protected her from having to produce him. The court, citing the required record doctrine, found that the mother did not have a legitimate Fifth Amendment concern. In California v. Byers, 402 U.S. 424 (1971), the court upheld California’s hit and run statute, reasoning that in certain instances “organized society imposes many burdens on its constituents.” The Byers court cited a host of decisions including Shapiro to reach its decision. Ordering a parent to produce her child in the face of previously documented allegations of child abuse or requiring that a motorist identify himself before he leaves the scene of an accident does not seem to implicate the same Fifth Amendment protections as the production of foreign bank records. The recent spate of appellate court decisions involving foreign bank accounts takes the required records doctrine much further. The Third Circuit, in applying this doctrine, justified its decision because these foreign tax records “serve legitimate noncriminal purposes, because government agencies use this data for tax collection, development of monetary policy, and conducting intelligence activities.”

The government has a significant interest in aggregating large amounts of data to fulfill a wide range of public policy applications. Therefore, the same could be said for almost any other record that a citizen may wish not to produce.

The Third Circuit’s decision is significant for two reasons. First, for individuals who have foreign bank accounts, if confronted with an IRS summons or a grand jury subpoena, they will be required to produce records—even if the production is incriminating or will yield a substantial civil penalty. Second, the decision is a clear erosion of constitutional protection. As Justice Felix Frankfurter pointed out in his dissent in Shapiro, “If Congress by the easy device of requiring a man to keep the private papers that he has customarily kept can render such papers ‘public’ and nonprivileged, there is little left to either the right of privacy or the constitutional privilege.” These court of appeals decisions are precisely what Frankfurter feared.

“‘Required Records’ Decision Erodes Taxpayers’ Fifth Amendment Rights,” by Matthew D. Lee and Jed Silversmith, was published in The Legal Intelligencer on August 18, 2015. To read the article online, please click here.

Reprinted with permission from the August 18, 2015, edition of The Legal Intelligencer © 2015 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.

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