Required Records Doctrine Trumps 5th Amendment Defense For Overseas Accounts!

Brass Scales of Justice on a desk showing Depth-of-field books behind in the background

On August 29, 2012 we posted Fifth Amendment Does Not Apply to Offshore Banking Records, where we discussed that the Fifth Amendment privilege against self-incrimination does not apply to records that fall under the Required Records Doctrine, and a taxpayer who is the subject of a grand jury investigation into his use of offshore bank accounts cannot invoke the privilege to resist compliance with a subpoena seeking records kept pursuant to the Bank Secrecy Act, the U.S. Court of Appeals for the Seventh Circuit ruled Aug. 27 (In re Special February 2011-1 Grand Jury Subpoena DatedSeptember 12, 2011, 7th Cir., No. 11-3799, 8/27/12).
Now the Third Circuit ruled that a married couple must turn over their foreign bank account records to the Internal Revenue Service, saying the couple can’t shield themselves by asserting their Fifth Amendment right against self-incrimination.

Upholding a lower court, the three-judge panel enforced IRS demands for information on undisclosed accounts allegedly held by Eli and Renee Chabot at HSBC Bank, citing an exception to the Fifth Amendment privilege for records that are required to be maintained by law. (Required Records Doctrine)

In 2010, French authorities tipped off the IRS to several U.S. citizens holding undisclosed accounts with HSBC. One of the accounts belonged to Pelsa Business Inc., an entity where Eli Chabot was the beneficial owner, the IRS was told.

The agency responded in 2012 by issuing summonses to the Chabots to testify and produce documentation on their foreign bank accounts, but the couple held to their Fifth Amendment rights and declined. The IRS later revised the summonses to limit their scope only to records that holders of foreign bank accounts are required to keep under the Bank Secrecy Act of 1970, but the Chabots again refused to comply.

On appeal, the Chabots’ arguments can be summarized as follows:

(1) allowing the government to rely on the required records exception to enforce the summonses in this case will lead to general governmental abrogation of the Fifth Amendment privilege for any “failure to report” crime;

(2) the information that would be gleaned from compliance with the summonses is almost identical to what the government needs to charge the Chabots with the felony of willful failure to report an overseas account in the Report of Foreign Bank and Financial Accounts, thus requiring the Chabots to incriminate themselves; and

(3) the records that 31 C.F.R. § 1010.420 requires accountholders to keep do not satisfy the three-pronged test for applying the required records exception to the Fifth Amendment privilege.

The government’s response to these arguments is that the Chabots’ records fall within the required records exception to the Fifth Amendment privilege. Therefore, the questions before the panel are whether the Chabots’ account records fall within the required records exception to the Fifth Amendment privilege and, if so, whether the Chabots’ policy concerns are insurmountable barriers to our application of this exception.

Unpersuaded by the overriding effect of the stated concerns, we conclude that the Chabots’ account records fall squarely within the required records exception to the Fifth Amendment privilege.

Therefore, we will affirm the District Court’s grant of the IRS’s petition. The case is U.S.A. v. Chabot et al., case number 14-4465, in the U.S. Court of Appeals for the Third Circuit.

Do You Have Undeclared Income from an Offshore Bank IRS? Want to Know if the OVDP Program is Right for You? Connect with me on TaxConnections.

Mr. Marini concentrates his practice in Representation before the IRS and All Other Tax Authorities, IRS Collections, Offers in Compromise, Installment Payment Plans, Appeals, Sales Tax Audits, International and Tax Law, Asset Protection and Estate Planning.

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