Tax Planning

Could the Government Force You to Tell Your Deepest Darkest Secrets?

It can… at least when it wants to ensure you're paying your taxes. Even though it goes against one of the hallmarks of the Bill of Rights, which reads:

No person shall  … be compelled in any criminal case to be a witness against himself.

And while the Fifth Amendment still stands in principle, the Feds have found a loophole that can force you to incriminate yourself… so long as it's written down.

And because of this technicality, in 1984, the Supreme Court decided: "The Fifth Amendment provides absolutely no protection for the contents of private papers of any kind."

That means that if a prosecutor subpoenas records you have put together on your own or because they require you to (e.g., tax records), you must release them. No ifs, ands or buts.

If you don't, you face contempt of court. And, the prosecutor may then use those records against you in a civil or criminal trial.

And believe it or not, it gets worse.

Any of your personal records held by a third party (like a bank) aren't protected either. Prosecutors can issue very broad summonses forcing these 3rd parties to hand over ALL personal and financial records that match whatever criteria the government says. Such "John Doe summonses" are widely used in tax investigations. Numerous court decisions have upheld the government's ability to use this tactic to gather information.

In recent years, prosecutors have become much more aggressive in using these summonses to uncover hidden offshore accounts held by U.S. taxpayers. Based on the data, they are coming after individuals they suspect have unreported accounts: individuals who the Feds think were supposed to file Treasury Form TD F 90-22.1 – the "Foreign Bank Account Reporting Form" – or FBAR, but didn't.

Failure to file can land you in some serious trouble… and gives the powers that be what they need to make your life a living hell.

Let me give you an example from Texas.

In 2009 – to avoid prosecution – Swiss banking giant UBS entered into an agreement with the U.S. Department of Justice. The bank admitted to conspiring to defraud the U.S. government by helping U.S. taxpayers commit tax evasion and in response to a John Doe subpoena, it also agreed to release the account records of approximately 250 U.S. taxpayers.

The subpoena forced UBS to identify U.S. account-holders whose activities prosecutors believed smelled of tax evasion.

Once the Justice Department got its hands on this data, it started issuing subpoenas to the account-holders UBS had identified, including at least one Texas resident. The U.S. Attorney in the Southern District of Texas convened a grand jury seeking to determine whether this resident – the "witness" – had evaded federal income taxes.

In 2011, the grand jury issued a subpoena for any foreign-account records he maintained to comply with the regulations around offshore banking. In legal speak, it required, "any and all records required to be maintained" in order to follow the regulations.

That included account numbers, the name and address of the foreign institution holding the accounts, the type of account, and the maximum value of each account for the years 2005-2008 – the same information the FBAR asks for.

When the witness refused to comply on Fifth Amendment grounds, prosecutors tried to force him to do what he was told.

In a measure of good sense, the district court denied the government's motion. Unfortunately, common sense didn't go much beyond that and on appeal, the 5th Circuit Court of Appeals reversed the decision.

That brings us up today.

As a result of this ruling, the witness could face heavy fines and even prison for five years or more.

Needless to say, if you’re a U.S. citizen with undisclosed offshore accounts, the odds are against you. It's much better to just come clean before the Feds come knocking.

Because they will, one way or another.

(NOTE: For your protection, be sure to retain a qualified tax attorney rather than an accountant. The lawyer can offer attorney-client privilege that your accountant cannot.)

Mark Nestmann

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