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.
Eight amendment – Prohibition on excessive fines – Excessive 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 amendment – Unreasonable 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 amendment – No 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 amendment – Filing 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:
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!
U.S. Persons Abroad - Members of a Unique Tax, Form and Penalty Club 