The required-records doctrine and the Fifth Amendment

By Timothy M. Todd, CPA/PFS, J.D., Lynchburg, Va.

Editor: Valrie Chambers, CPA, Ph.D.

The IRS has broad inspection powers under Sec. 7602 to "examine any books, papers, records, or other data which may be relevant or material" to determine a person's tax liability. Consequently, the IRS can request various documents relevant to determine a taxpayer's federal tax liability; recent salient examples include requests for foreign bank records. Taxpayers often resist these document requests and invoke a variety of defenses. A commonly raised defense is the Fifth Amendment protection against self-incrimination. This item discusses the Fifth Amendment protection generally in tax practice and one of its important exceptions—the required-records doctrine.

The Fifth Amendment provides, in relevant part, that no person "shall be compelled in any criminal case to be a witness against himself." In short, the privilege applies if a person would be forced to provide a testimonial communication that would incriminate the person in a criminal proceeding. Moreover, a testimonial communication, as elucidated by the Supreme Court, is one that explicitly or implicitly conveys factual information (Doe, 487 U.S. 201 (1988)). The Fifth Amendment is readily implicated in various tax contexts, ranging from tax return preparation to audits and criminal tax investigations. The specific contours of the privilege are interesting and are fleshed out by numerous court decisions that are beyond the scope of this discussion.

One of the contexts in which taxpayers have self-incrimination concerns—among the many that can arise in tax engagements—is related to foreign bank accounts and related reporting requirements. The Bank Secrecy Act (BSA), P.L. 91-508, and its implementing regulations require taxpayers to maintain records regarding, among other things, account holder name, account number, name and address of the foreign bank, and maximum value of the account during the reporting period; these records are to be kept for five years. Production of these records in response to an IRS summons can reveal, for instance, that information was not reported or that information reported was inaccurate. Consequently, incrimination concerns abound.

Interestingly, in Fisher, 425 U.S. 391 (1976), the Supreme Court held that documents are generally not protected by the Fifth Amendment. The Court noted that a production of documents generally "does not compel oral testimony; nor would it ordinarily compel the taxpayer to restate, repeat, or affirm the truth of the contents of the documents sought." Under certain circumstances, however, documents can provide the required testimonial communication through the act-of-production doctrine.

The act-of-production doctrine recognizes that, under the right circumstances, the act of producing the documents conveys testimonial or factual information. For example, in Berry, 807 F.Supp. 439 (W.D. Tenn. 1992), the taxpayer argued that production of various tax records would inform the IRS that such records existed and were in his possession. Moreover, the production would also convey that he believed that the documents were reliable and authentic. The district court agreed and allowed the taxpayer to invoke the privilege.

Nevertheless, another doctrine—the required-records doctrine—can moot these points and allow the government to force the production of various records. The Supreme Court established the required-records doctrine in Shapiro, 335 U.S. 1 (1948). In Shapiro, the Court held that the Fifth Amendment privilege cannot be used to protect records that are required to be kept by law regarding transactions subject to government regulation. Later cases fleshed out the required-records exception to require that (1) the regulatory scheme must be "essentially regulatory"; (2) the records must be of a kind customarily kept; and (3) the records must have acquired "public aspects."

These issues—the Fifth Amendment and the required-records doctrine—have intersected in various tax contexts. Recently, these issues emerged in disputes regarding the production of foreign bank records, i.e., the government's desire to unearth undisclosed foreign accounts. One of the major cases in this area is In re M.H., 648 F.3d 1067 (9th Cir. 2011), in which a U.S. district court held the taxpayer in contempt for failing to comply with a grand jury subpoena demanding records relating to foreign bank accounts, which the government alleged were used to evade paying federal taxes. The Ninth Circuit held that the required-records doctrine applied and that the taxpayer could not use the Fifth Amendment to quash the subpoena.

The governing regulatory scheme was the BSA, which requires that taxpayers with offshore accounts maintain certain information for government inspection. Moreover, that information is like that required to be provided annually to the IRS via FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). First, the Ninth Circuit determined that, although the BSA may have been partly designed to combat criminal activity, it was essentially regulatory. Second, the court held that the records and information were of a kind customarily kept because, among other things, the information was needed to access the account (e.g., name, account number, type, foreign bank, etc.). Third, the court concluded that the information had public aspects because it was required to be maintained and disclosed to ensure the "effective regulation of offshore banking." In sum, therefore, the Fifth Amendment privilege did not bar compelled production of the documents.

Other courts arrived at this conclusion, too. For example, the Third Circuit, in Chabot, 793 F.3d 338 (3d Cir. 2015), recently held that foreign bank account records fell within the required-records exception. There, the taxpayers argued that producing records in response to an IRS summons regarding foreign bank accounts would expose them to liability for not filing the same information in FBARs. In other words, even if the underlying information was not protected, the act of producing the information was protected under the Fifth Amendment.

The Third Circuit disagreed. First, it found that the BSA and its related regulations—in particular, 31 C.F.R. Section 1010.420—were essentially regulatory because owning a foreign bank account was not an inherently criminal activity, e.g., persons can own foreign accounts for myriad legal reasons, such as convenient access to money while living abroad. Second, the court found that the kind of information to be maintained under Section 1010.420 was of the type customarily kept, e.g., to access the account. Third, the Third Circuit found that the records had public aspects because, in part, the required information is disseminated to various government agencies to implement economic and regulatory public policies.

Foreign bank account records are not the only type of tax records against which courts have applied the required-records exception. For example, some courts have used the exception against income tax returns, Forms W-2, and Forms 1099, although not all courts agree about its extent. The Seventh Circuit, for example, in Porter, 711 F.2d 1397 (7th Cir. 1983), held that canceled checks and deposit slips are not required records merely because Sec. 6001 requires taxpayers to keep adequate records to establish the amounts of gross income and expenses shown on a tax return.

Many aspects of federal tax practice give rise to self-incrimination concerns. A hot area of investigation and prosecution recently has been taxpayer offshore accounts. Myriad self-incrimination concerns are present in this context. And, although the Fifth Amendment can offer some protections, often an exception may apply. Therefore, anytime a taxpayer has concerns about potential incrimination, he or she should engage counsel immediately.

 

Contributors

Valrie Chambers is an associate professor of accounting at Stetson University in Celebration, Fla. Timothy M. Todd is associate dean for academic affairs and associate professor of law at Liberty University School of Law, Lynchburg, Va. Mr. Todd is a member of the AICPA Tax Practice & Procedures Committee. For more information about this column, contact thetaxadviser@aicpa.org.

 

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