FBAR and the constitution: A Fifth Amendment Update

Cross posted from RenounceUScitizenship

As FBAR enforcement grows, it is inevitable that various aspects of Mr. FBAR will be subjected to constitutional scrutiny. Although it will take time, Mr. FBAR will certainly be invited for lunch by the Supreme Court of the United States. The FBAR rules apply to U.S. persons regardless of where they live. Therefore, the FBAR law is also an extraterritorial application of U.S. law. Therefore, I could imagine a circumstance where the obligations imposed by Mr. FBAR could be considered by a foreign court. (How about this for an example: A U.S. citizen is a real estate broker in Canada. As such he is required to maintain a trust account. Clearly the FBAR law would require the account to be disclosed to the U.S. government and the records retained for a “fishing expedition”. Imagine further a Canadian statute that criminalizes the disclosure of the contents of trust accounts. This sets the stage for the a “conflict of laws” issue. FATCA anyone? But, this is all for another post.)

The Constitution of the United States of America

You will find it here – definitely worth a read.

Mr. FBAR and the U.S. Constitution

FBAR requires the reporting of foreign financial  accounts and the retention of financial records.  The requirement to report financial accounts is NOT a requirement to report a “taxable transaction”. Therefore, the requirement  to report financial accounts is  a requirement to “turn over the keys to your finances” to the government. Once the government has the keys, they can unlock the doors, look around as much as they want, make notes of things to ask about and discover all kinds of things that are unrelated to taxes. Should citizens be required to give the government the keys to their lives?

What might the constitution say about this?

What would be the constitutional basis for a challenge to FBAR?

The short answer is: We don’t know for sure until the courts have rendered a decent number of decisions on these matters. Furthermore, the courts will rule only if the issue is squarely before them. Furthermore, it is highly unlikely that government lawyers will argue for the unconstitutionality of Mr. FBAR. Hence, the courts will rule only when a “well heeled” defendant has decided that it is worth his/her expense to make the argument. Therefore, it won’t be coming soon. But, it will be coming.

Therefore, it’s worth identifying some of the possible areas where Mr. FBAR might be vulnerable to a constitutional challenge.

Eighth amendmentProhibition on excessive finesExcessive FBAR penalty – See what ACA says about excessive FBAR fines

Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.

Fourth amendmentUnreasonable search

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

Sixth amendmentNo fair trial possible for expats

In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the State and district wherein the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the Assistance of Counsel for his defence.

Fifth amendmentFiling an FBAR may be a waiver of  fifth amendment right, Two cases involving offshore accounts, FBAR and the fifth stream of consciousness

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

What’s new in FBAR and the constitution?

On February 23, 2012, the Eleventh Circuit Court of Appeals handed down a decision of the importance for some dealing with FBAR issues. I recommend reading the whole decision but important analysis is here:

http://www.fuerstlaw.com/wp/index.php/29/11th-circuit-court-of-appeals-decision-regarding-act-of-production-doctrine-has-implication-for-bank-secrecy-act-and-foreign-bank-account-report-fbar-cases/

This ruling is significant to those individuals who are currently under IRS and/or U.S. Department of Justice Investigation for failure to comply with the Bank Secrecy Act’s requirement that U.S. Taxpayers who have foreign bank accounts with more than $10,000.00 must file Form TD 90.22-1, commonly referred to as an FBAR.  A copy of an FBAR can be found here.

The 11th Circuit’s decision appears to support Taxpayers’ position that a grand jury subpoena requiring them to identify (and produce bank statements of) foreign bank accounts in which they have signatory authority over or a financial interest in, is in violation of the 5th Amendment.  As the 11th Circuit put it:  “What is at issue is whether the act of production may have some testimonial quality  sufficient to trigger Fifth Amendment protection when the production explicitly or implicitly conveys some statement of fact.”  Slip op. at 13.  “An act of production can be testimonial when that act conveys some explicit or implicit statement of fact that certain materials exist, are in the subpoenaed individual’s possession or control, or are authentic.”  Slip op. at 20. 

A full copy of the decision can be found here.

In respect to FBAR cases, the act of production of the foreign bank account statements conveys an explicit statement that the taxpayer has a financial interest in, or signatory authority over, an undisclosed foreign bank account; the bank statements are within the taxpayer’s possession or control; and that the bank statements (and the information contained therein) is authentic.  This case present a potential arrow in the quiver of taxpayers that are currently (or may be soon to be) litigating against the government.  However, a timely challenge to a grand jury subpoena is crucial, as a failure to timely assert the 5th Amendment may  result in waiving this valuable constitutional right.

I highly recommend the commentary about this case by Jack Townsend.

Interesting decision. Sooner or later Mr. FBAR will visit the Supreme Court!

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11 thoughts on “FBAR and the constitution: A Fifth Amendment Update

  1. Thanks for this post. It seems that if the courts are going to vacate FBAR, it will be the whales who challenge it. The whales who are guilty of tax evasion have rights. How much more, those of us who are minnows who never had mens rea?

  2. great post @renounceuscitizenship, have yet to digest it – and to finish reading all the links.
    thanks for putting it together in such a well crafted way.

  3. What is with all the attacks on the Supreme Court? Why even have a Supreme Court if politicians want to be able to make laws unchecked?

    Elizabeth Warren Launches Broadside Against Supreme Court

    Elizabeth Warren, a Democratic contender for the U.S. Senate seat held by Republican Scott Brown, issued a broadside yesterday against the Supreme Court, which she said has gotten “involved in policymaking” by questioning the constitutionality of a federal health-care law.

  4. It is more than clear; the Bill of Rights was written specifically to prevent stuff like FBAR from happening.

    Let us now see if the Supreme Court will actually do it’s job.

  5. Great summary and well put. But you forgot to mention the lack of proportional representation in Congress (Census doesn’t count Americans abroad), which violates Article 1 Section 2 of the Constitution. I think this is most important, as it says to me that with respect to Americans abraod, the US government does not exist.

  6. @Jefferson D. Tomas said: Couldn’t we pool our money and launch a class-action suit rather than waiting for somebody with deep pockets to fight FuBAR FATCAt, double taxation in the courts?

    That is what I strongly believe would work. Count me in. Also we could do other things that are much simpler.

    Apply for information about (i) percentage minnows in the 33,000 OVDI participants and (ii) total penalties (not including taxes) collected from the minnows living abroad, under Freedom Of Information Act (FOIA).

    The IRS is extremely un-cooperative and doing every thing in its power to hide this information (so far) from the world. We could hire a lawyer to file a legal compliant.

  7. The class action suit is possible if (1) we organize and hire someone; (2) a lawyer decides to take the case. But I don’t think a class action will be necessary. Let the whales, who have money, fight this. When the courts find that the whales’ constiutional rights are violated, the rest of us will be off the hook a fortiori.

    If you look at the violation of constitutional rights being violated (see sidebar for the list), those rights apply both to the whales and to the minnows. Thus, it is only a matter of time before a whale takes this all the way to getting FBAR, 8938, 8854 found unconstitutional (IMHO).

  8. As to why an ISA isn’t tax free in the US but an IRA is tax free in the UK I believe the whole thing rests upon the pcseenre of the magic word retirement in the expansion of IRA, and its absence in the expansion of ISA.When choosing a retirement vehicle in the US there’s a broad choice between a taxed-later-but-not-now traditional IRA and taxed-now-but-not-later Roth IRA. In the UK there’s pretty much the same decision, between a taxed-later-but-not-now SIPP or similar and a taxed-now-but-not-later ISA. Unfortunately, because the ISA’s not primarily a retirement account one could also use it to save for a house, for college, for children it falls outside the tax treaty. (The Canadian equivalent would be the TFSA, also not recognized by the US. Can Canadians use TFSAs in place of RRSPs? If so, it sounds like they’ll be in an even worse position than RRSP holders )Now, because an ISA usually holds mutual funds, once it falls outside the tax treaty it’s quite likely to then be covered by PFIC rules. So after holding an ISA for a few years while in the US (and remember, this is an account set up for retirement saving) the unfortunate holder might find himself with an effective US tax rate of 100% of the gains, thanks to the miracle of the PFIC interest and compounding rules. Compare with 0% if that same individual had not gone to the US, and with 0% of a US citizen living in the UK with a Roth IRA, and you can see just how badly the US can treat UK retirement savings, how utterly the UK/US tax treaty fails in places and why UK citizens are discouraged by US tax laws from working in the US, even temporarily.

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