Miranda Rights, FBAR, and the IRS’s Offshore Voluntary Disclosure

This is a thought experiment regarding the Miranda Rights and how they might properly apply to OVDI and FBAR.   If a big boy says to a little boy at school, “Give me your lunch money or I will clobber you on your way home today.” The teacher sees the little boy hand the money over to be the big boy. The big boy says to the teacher: “He gave it to me voluntarily.”

UPDATE:  Steven J. Mopsick, 30 year IRS Veteran has responded.

In 1963 Ernesto Miranda confessed to theft, kidnapping and rape and was convicted.  But the Supreme Court ruled that law enforcement failed to inform him of his Fifth Amendment right not to incriminate himself; and the Court therefore ordered a new trial, not permitting the evidence of his confession.  As a result of this, law enforcement routinely informs arrested criminal suspects of their Miranda Rights, so that the evidence that the suspect provides may be admissible in court.

The analogy to FBAR and to Offshore Voluntary Disclosure Initiatives (OVDI) is perhaps not obvious.  In the OVDI, the IRS agrees not to bring criminal charges provided that the suspect co-operates with the proceedings.  So this remains at the level of civil law.  But I nevertheless suspect that the IRS has largely set aside the constitutional guarantees to due process (see Fifth Amendment), both substantive and procedural due process.  As I have argued, the OVDI is a make believe world in which a person has no rights, and in that world, the IRS makes up the rules as they go along.

These are dangerous waters that the IRS is navigating in light of Miranda.  In the Miranda decision, the Supreme Court made it essentially illegal to convict a person based on information provided by the suspect who was not been informed of his rights.  It would seem to me that the intent of Miranda is to guarantee that law enforcement conducts its business in a manner that respects constitutional rights.

The IRS, with the authorization of Congress, has acted in a manner which seems callous and oblivious to constitutional rights.  First, the requirement to file FBARs is tantamount to a general warrant, in violation of the Fourth Amendment.  Second, it is oblivious to the Fifth Amendment rights–forcing citizens to hand over information that is potentially incriminating.  Third, it threatens with fines that are way out of proportion to the damage done to government, in violation of the Eighth Amendment: e.g., a $10,000 account earns in a year interest of $100, for which $25 tax is owed–damage to the government, $25; potential non-wilful fine, $10,000; potential wilful fine, up to $100,000 or 50% of the contents of the account per annum.

I wonder how much time the IRS spends informing OVDI suspects of their rights under the Constitution.  E.g., do they mention that if the fine is over $20, that the person has a right to a trial by jury?  Do they remind suspects of their right to a jury of their peers in the district in which the crime occurred?  Do they inform them going into the program, that they must waive their Fourth and Fifth amendment rights?  What the suspect perhaps doesn’t know is that after handing over the required account information, it will be nigh on impossible to defend oneself against charges; but furthermore, the IRS would have a hard time even getting an indictment without the information provided by the suspect himself, FATCA notwithstanding.  Take me for example.  I have said that I won’t do an FBAR.  What are they going to use to indict me?  My RRSP that I disclosed in my tax returns?  Give me a break.  I could go to jail and pay hefty fines because I didn’t file an FBAR on an RRSP that the US already knows about?

Essentially, with OVDI the IRS seems to have created a make-believe world in which all Constitutional rights don’t exist in order to extort money from suspects. Miranda, in essence, is supposed to remind law enforcement not to abuse constitutional rights by requiring it to inform suspects systematically of their rights.

I wonder if the OVDI is actually ripe for a serious court challenge–and that the billions that the IRS has collected could be in serious jeopardy.  But I suppose that the IRS has also said that it will charged with criminal penalties anyone who decides to appeal their fines under OVDI.

But furthermore, I think that the whole program has been completely discredited, not least of all by the criticisms of the Tax Advocate Service, but also by the testimony of minnows who have been in the program.  Certainly no Canadian resident should ever enter the program.  Quiet disclosure or go-forward compliance is a much better option than the OVDI.  But I honestly think that Canadian residents would do very well to ignore completely the FBAR filing requirements–but I’m sure that a real professional will come along and say that people need to be extremely cautious before taking such a suggestion, and further, that I am painting myself as a tax protester.  Yet I can’t help but think that our own Finance Minister would encourage me in this.

But my reasoning is thus:  If (1) the IRS needs the information to charge you with a crime or to assess a criminal penalty and (2) your assets are in Canada and the Canadian government will laugh at the United States attempts to collect your FBAR fines here in Canada, then the risk goes up exponentially with any and all attempts of compliance with FBAR.  Miranda Rights say, “You have the right to remain silent; anything you say will be used against you in a court of law.”  Thus, I remind readers that OVDI, quiet disclosures and go-forward FBARs, are a tacit waiver of the very constitutional rights that could protect us.  I understand if some need access to the United States and want to remain in compliance with FBAR, and that they want to keep their US passport.  But Schubert’s suggestion is excellent:

I appreciate that some people feel they have to be able to cross the US border, either for family or business reasons. However, I strongly suggest anyone who is concerned about the costs, both financial and moral, of complying with IRS extortion, seriously consider the option of refusing to comply with IRS demands and not crossing the border again. Yes this may have a down-side for you, but what is the trade-off in terms of costs to you, your family, and your retirement if you comply with the IRS?

originally published:  FEBRUARY 14, 2012

23 thoughts on “Miranda Rights, FBAR, and the IRS’s Offshore Voluntary Disclosure

  1. If the US wants to tax extraterritorally, fifth amendments should apply in like manner.
    for example if answering a question on any tax form would violate Canadian privacy law, Canadian residents should have the same rights as US residents when responding.

  2. @rivka88 Fifth Amendment does not apply to tax forms. It is considered necessary not to incriminate but to collect income taxes which are permitted by the 16th amendment. The Fifth Amendment applies to FBAR because it is part of the Bank Secrecy Act not the tax code.

  3. Good thought experiment Petros, but fortunately fear trumps Constitutionality arguments. It is only unconstitutional when the Supreme Courts says it is, and there is not one Minnow out there that is going to challenge it, nor one attorney who will take the case on, and so we are left with what it is, sad to say.

    For me the major issue is this, setting aside the constitutional arguments:

    THE OVDP/OVDI is JUST STUPID POLICY!!!

    Anytime you have to use fear and such draconian and drawn out bureaucratic practices to extract taxes, huge disproportional penalties with a corresponding minor uptick in compliance, you lose. My experience was 851 days start to finish, and there was no way the IRS reaped a positive benefit that is quantifiably better that could not have been obtained in another more positive way!! Instead it has an angry customer, and every Business in the world wants to avoid those types of customer service failures, as they can do lasting damage to the Brand. Word of mouth negative marketing can be devastating.

    The IRS and the US Government Brand is losing BIG TIME with all the anti-American feelings that are being generated around the world by the very folks that should be the champions of America Constitutional principles, it’s Expats and its immigrants.

    The list of negatives of how the IRS has conducted itself is so extensive, that in my opinion, it far outstrips the meager revenue it is generating or will ever generate. It is like the War in Iraq, the Bush Administration can claim victory for “freedom and Democracy” all they want, but the fact remains, when you tally the cost in lives, treasure and influence, America lost big time!

    So, Mr Shulman, your press releases of success ring hollow to us that really know, and we are the ones that will eventually set the record straight. You and your leadership team are too bureaucratically bound and politically blind to understand.

    Mission Not Accomplished!

  4. @Petros: The gist of the OVDI and indeed the entire voluntary disclosure IRS/DEPARTMENT OF JUSTICE policy is, IF you have committed acts which might be a crime, for example, failing to report hundreds of thousands of dollars of income from your domestic or offshore business, or lying on your tax return by denying that you have any foreign bank accounts when in fact you knew about FBARs as evidenced by your filing of the same for some but not others of your many foreign bank accounts, AND you file truthful amended tax returns reporting all your unreported income, pay the tax, interest and penalties, as well as any delinquent FBARs, AND you cooperate with the IRS in case they want to ask you about any foreign bankers who came to your home in the USA from Andorra, the Cayman Islands, Nevis, Bermuda, Switzerland, or Liechtenstein, whom the IRS may be interested in talking to, THEN you will not be investigated by the Criminal Investigation Division, nor will the US government file criminal tax charges against you.
    Neither the Miranda doctrine nor the Fourth Amendment guarantee against unreasonable searches or seizures have anything at all to do with voluntary disclosures. They come into play in a controversy between a citizen and the government when the issue is whether or not the government may be trying to lock you up and separate you from your family and property. In other words, the Miranda doctrine and freedom from unreasonable searches and seizures come into play when there is a criminal matter.
    In a voluntary disclosure, the government and the citizen ARE AGREEING IN ADVANCE THAT ALL THEY ARE TRYING TO ACCOMPLISH IS TO GET PEOPLE CAUGHT UP ON THEIR TAXES AND THE IRS IS SAYING IN ADVANCE, “THERE IS NO CRIMINAL ISSUE HERE.”
    In fact the 5th Amendment does apply to tax returns because under certain circumstances, there is a possibility that in filing a return, a taxpayer may incriminate himself. In those circumstances, the lawyer for the taxpayer has his hands full because the case law says it is possible under some circumstances to “claim the Fifth” on a tax return but there are a lot of hoops you have to go through first but it can be done. So the Fifth Amendment does apply to tax returns which are filed under the Internal Revenue Code which is title 26 of the United States Code and it also applies to FBAR’s which, as you correctly point out, are authorized by the Bank Secrecy Act which is part of Title 31 of the US Code.
    Outside of a voluntary disclosure you are correct when you say, “quiet disclosures and go-forward FBARs, are a tacit waiver of the very constitutional rights that could protect us,”
    That is absolutely correct. That’s why many practitioners counsel people to make VD’s because there is almost a guarantee of no cirmininal investigation.
    That is why I have been saying all along here and in my blog that if you think you will incriminate yourself by filing a truthful tax return or a delinquent FBAR you should seek competent legal advice and try to find out if your fear is well-founded or rather unlikely.
    30 Year IRS Vet

  5. @ Steven, thanks for this response. I am an investor. Let’s put two investment scenarios and the risk involved:

    (1) You do a certain action and you have 100% chance of losing 27.5% of your investment portfolio.

    (2) You do nothing, and you have an ultra-slim to zero chance of losing a much larger percentage than 27.5% of the investment portfolio.

    Given the two scenarios above, doing nothing is by far much less risky option. Especially since the second option allows the person to maintain Fourth and Fifth Amendment rights, whereas the first one requires the waiver of all rights. The OVDI is not a good option for those living in Canada, whose government has said they will not collect. Indeed, the only money that the IRS will get is what we voluntarily give to the IRS, because they have no tools for collecting from a person whose wealth is in Canada.

    And here is where I am angry. When I hear about Canadians having entered the OVDI program, I become angry, with the Canadian government for not providing greater protections, with the IRS for extorting the money, and with tax professionals for suggesting that their clients enter the OVDI. The IRS is stealing legally from our people up here. It is a casus belli.

  6. @ Steven I should also say that the due process rights of individuals are violated, in my opinion, in the OVDI, because the FBAR law itself is a violation of the Eighth Amendment. So it is actually the fear of unconstitutional extortionate fines that creates the atmosphere where people would agree to hand the IRS 20%, 25%, 27.5 % of their wealth, including their homes, to the IRS. So when I say the Fifth Amendment applies in any case, it is the “due process” aspect which is completely ignored by the IRS. The IRS should not act in a manner which ignores due process even within a voluntary program. This is what is abridging the freedom of property ownership which is guaranteed by the Declaration of Independence and the Constitution, and by the way, English property rights since the Magna Carta.

    What am I saying? I don’t give a damn that you claim that it’s voluntary. Because it is not voluntary. It is voluntary given the extortionate fines–i.e., for most people it is a choice between how you are going to have your rights violated, a Hobson’s choice: choose extortionate fines or this other option that caps your loses at 20,25,27.5%. This is not due process. This is the behaviour of a bully. And this is the very thing that the framers of the US wanted to avoid, a federal government that bullies the People.

  7. A person cannot claim the Fifth Amendment in failure to file a tax form, or Al Capone would not have gone to jail. But as you say, a person can claim privilege on parts of the form, such as if the activity which generated the income is criminal. But the FBAR is part of the Bank Secrecy Act, and a legal scholar has suggested that even the filing of a Fifth Amendment FBAR (i.e., file the form with Fifth Amendment on any parts that could incriminate), is potentially incriminating and thus a substantial hazard.

  8. @Petros,

    It was not out of fear when I jumped into OVDI believing some fairness on penalty.

    People would be fearful if they were aware of FBAR responsibility while willfully refused to do so. For people who keep money offshore of their residence in tax haven, using entity to cover up, they might be fearful.

    For me, it was more of doing it right and otherwise it would become willful.

    After learning IRS’s position on RRSP, I do regret it. I would have been in peace (at least morally) to become a thief when I see this giant robber.

  9. I don’t feel guilty of anything because I hadn’t known about FBAR. I also had thought that since my assets were in tax free investments in the UK that I didn’t need to declare them on the US return, especially as I believed I was protected from double taxation by the tax treaty.

    Of course, this has turned out not to be correct. I went to a specialized accountant who amended my returns showing all the previously unreported investment income and six years of delinquent FBARs.

    I was very disappointed to learn that I’d have to pay thousands in taxes, back interest and penalties but was at least still willing to pay it. But what I wasn’t prepared to do was to sign away my constitutional rights and lose a large portion of all my assets in OVDI when my mistakes were innocently made.

    That’s all I can say, really. It’s still early days so will just have to wait and see if they come back with an audit or FBAR fines. I’d imagine they’ll have at least three years from last October 15 to audit the amended returns and six years from last June 30th to audit my late FBARs.

    I filed my 2011 FBAR this past Monday by FedEx. As I had over 25 accounts, they may well come back to me with questions though would imagine they could any information on my 8938 which will be directly attached to my 1040 for 2011. It’s so onerous though. 😦

  10. @monalisa1776,

    Regarding number of accounts,

    If you can consolidate accounts in the same bank into one, for example, I have TD bank account, one is RRSP the other is non-RRSP. Each CD is like XXXX-01 XXXX-02, to me this is one account. It would drive me nuts to list each of -01, -02, the reason to spread CD into different mature date is to make sure I can always withdraw large amount money almost the same way to put money into saving account.

    So, in my FBAR form, I just add all CDs into one. I am doing this to reduce US Government workload — should be award for being so helpful -:)

  11. @IJ, I wasn’t sure how to report the separate accounts so assumed they all had to be listed separately but perhaps I only made things more complicated for myself. Oh well, what’s done is done. They’ll all have to be separately listed on the 8938 anyway though.

  12. il,
    We have a similar situation as you did. Know what you know now (RRSP penalty base), what will you do? Quiet Disclosure or going forward? We would enter the program if they leave our RRSP alone…..Thanks!

  13. @Civic,

    I am in OVDI already. So, I have only one option left, opt-out — that means to face off with possible DOJ prosecutors.

    I could have just done QD or forward — but I wanted to clean up my mess of the past. I am a US resident so I am weaker morally and legally. OVDI can make it clean and to sleep well.

    Now, it seems IRS wants to take advantage of people who are in OVDI by imposing penalty on otherwise no tax implication assets…

    I think you are right, if IRS has no shame to impose penalty on RRSP, then you should not feel bad about your non-compliance.

    When the robber rules the world, all thieves should just keep hiding.

    I used to be a decent/honest guy — but I am changing — and the change we all believe in -:)

  14. ij,
    did you consult with lawyers/cpa before taking a decision or
    as soon as you came to know about the OVDI and your FBAR lapse, did you jump without thinking through much? I am assuming at the point you would not have an idea on how many are impacted by this and how others are dealing.

    i hope the service does see a reason and excluse the RRSP

  15. @desi,

    I did not talk to anyone before making such a decision. I read a Chinese news about FBAR/OVDI not long after I sent out my 2010 return.

    Right after I got a pre-approval from IRS/CI, I started to collect my bank statements (not too hard as they were in Canada),

    I did however talk to OVDI hotline about RRSP and was told it should not be included as I could ask for 9100 relief for deferral tax election.

    IRS is known of changing policy (even in the middle of the game). As late as in Jan 2012, I was told RRSP should be excluded, but recently it seems the policy changed again.

    Now, I understand what then Candidate Obama’s “Change we believe in”…. I do believe now -:)

  16. i sincerely hope and wish thinks work out for you. To me, it appears based on your facts that you may not be a candidate for the OVDI. Hopefully opt out works in your favor with lesser legal costs.

    Not that consulting a lawyer would have made a difference, since a good majority of them where pretty much buffaloing everyone in, at the least they might have given you the different options available. A select few do offer some good meaningful suggestions without using this opportunity to bleed the minnows.

    good luck

  17. ij,

    I can almost guarantee that you won’t have to face off with any DOJ prosecutor. There is no way they are going to take it that far.

    If you decide to Opt Out, they will come to a settlement there. I don’t think they will want to waste a lot of time ligating your case. In a worse case, if you still don’t like what comes of the Opt Out, it will go to Appeals, but no DOJ lawyer in their right mind is going to take it any farther and go to court to collect your FBAR penalty.

    That is my opinion, and I do base it on the facts you have provided me, so even though I think you would almost enjoy the argument with a DOJ lawyer, (I do think you would wear them down!) I don’t think the IRS will give you a chance. Sorry. They are smarter than that! LOL

    mvh

  18. Just Me,

    With your support, I am fearless. I was thinking of facing off DOJ lawyers. Loss is no shame, I can sell my story — how a little guy like me was robbed by IRS on his retirement savings (for god sake — it is only 50K for a family of 5K that I worked for 10 years in Canada)…

    It can be sensational — ;).

  19. ij,

    but as I have learned, no one in “Real America” cares about these things, and getting the press attention of an abuse that is going on in plain sight, is darn difficult. They would rather spend time talking about Romney’s dog on a car roof trip, or whether or not a Santorum backer thinks aspirins make good birth control.

    Go figure.

  20. Just Me,

    Make sense, as I only learned about FBAR enforcement from a Chinese web site instead of TV news and other major media as they covered story like Lindsay Lohan and Charlie Sheen.

    So, it would only a sad story on this forum -:)

  21. To all. I would respectfully ask that you read my post today on the 2% Payroll Tax and what I wrote about the IRS Manual and penalty administration particularly, the duty the IRS has to administer the FBAR penalties in a reasonable manner.
    @Petros: may I suggest a change of perspective. You don’t know every Canadian who may have entered into one of the OVDI programs. In fact for some of them, and some Canadians who may be signing up to make one right now, would be embarrassed to talk to you about it because FOR THEM IT WAS A GOOD DEAL! THEY HAD BEEN FILING FALSE TAX RETURNS. In some cases, they would have done jail time had the IRS come to them first. Again, OVDI is not for everyone. Sadly, some people receivd bad advice about OVDI and did not properly weigh their options. I guess some tried to do it themselves. That said,
    It’s one thing to be listed in a computer data base. It’s quite another for a government program to hunt for your name and spit it out for special abuse.
    If you haven’t had any reason to think of the IRS for a period of the recent ten or twenty past years, you probably don’t have anything to worry about..
    Respectfully submitted,
    30 Year IRS Vet

  22. @Steven,
    “FOR THEM IT WAS A GOOD DEAL! THEY HAD BEEN FILING FALSE TAX RETURNS. In some cases, they would have done jail time had the IRS come to them first.”

    Can you be more specific what facts would lead to jail time ?

    Filing incorrect return with incorrect perception is not filing false return which IRS has to prove 1. affirmative act, 2. tax due, 3. acting willfully.

    Did Tim Geithner file false return ? And so did Charles Rangel ?

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