Foreign Bank Account Records and the Required Records Exception to the Act of Production Doctrine

For those exposed on foreign accounts (i.e., no FBARs and no income tax reporting), the Government is brandishing a weapon that some taxpayers may not anticipate -- end-runs around the Fifth Amendment that would otherwise apply to avoid incriminating oneself. The end-runs are the "required records" exception to the Fifth Amendment and possibly the "foregone conclusion" exception to a Fifth Amendment act of production claim. I have previously blogged on the foregone conclusion exception here and focus here on the required records exception.

Just for background, there is now no Fifth Amendment privilege for the contents of documents (not even diaries which are, after all, not made under compulsion), but there is a Fifth Amendment privilege under the "act of production" doctrine relating to the testimonial aspects of compulsory production of documents (i.e., identifying documents, acknowledging their existence, etc.). So, the Fifth Amendment privilege is alive and well for compulsory document production in many cases. Hence, the Government needs end-runs such as the required records exception and the foregone conclusion exception.


Now, of course, in the foreign financial account context, the Government would love to be able to get the account statements as well as all account related documents (such opening documents showing who the real owner of the account is). We understand that the Government has already issued a subpoena to a taxpayer identified as having one or more foreign accounts. That taxpayer is only one of many who have not joined the voluntary disclosure program. The subpoena seeks (in its document description):

You must also bring with you the following documents, electronically stored information, or objects:

FOR THE YEARS: 2003 - present. Any and all records required to be maintained pursuant to 31 C.F.R. § 103.32 relating to foreign financial accounts that you had/have a financial interest in, or signature authority over, including records reflecting the name in which each such account is maintained, the number or other designation of such account, the name and address of the foreign bank or other person with whom such account is maintained, the type of such account, and the maximum value of each such account during each specified year.

Since the taxpayer is a potential target and targets are not generally forced into the grand jury, the subpoena permits compliance by delivering the documents, electronically if possible, to an IRS agent assisting the grand jury.

The FBAR requirements are in Title 31. One of the Regulations underlying the FBAR requirement is 31 C.F.R. § 103.32 which the Government cites in the subpoena. That regulation provides:

§ 103.32 Records to be made and retained by persons having financial interests in foreign financial accounts. Records of accounts required by § 103.24 to be reported to the Commissioner of Internal Revenue shall be retained by each person having a financial interest in or signature or other authority over any such account. Such records shall contain the name in which each such account is maintained, the number or other designation of such account, the name and address of the foreign bank or other person with whom such account is maintained, the type of such account, and the maximum value of each such account during the reporting period. Such records shall be retained for a period of 5 years and shall be kept at all times available for inspection as authorized by law. In the computation of the period of 5 years, there shall be disregarded any period beginning with a date on which the taxpayer is indicted or information instituted on account of the filing of a false or fraudulent Federal income tax return or failing to file a Federal income tax return, and ending with the date on which final disposition is made of the criminal proceeding.

103.24, in turn provides:

103.24 - Reports of foreign financial accounts.  (a) Each person subject to the jurisdiction of the United States (except a foreign subsidiary of a U.S. person) having a financial interest in, or signature or other authority over, a bank, securities or other financial account in a foreign country shall report such relationship to the Commissioner of the Internal Revenue for each year in which such relationship exists, and shall provide such information as shall be specified in a reporting form prescribed by the Secretary to be filed by such persons. Persons having a financial interest in 25 or more foreign financial accounts need only note that fact on the form. Such persons will be required to provide detailed information concerning each account when so requested by the Secretary or his delegate.

OK, so there it is the regulatory framework for the records that are being subpoenaed. The taxpayer's first line of defense is, of course, the act of production doctrine. The Government's comeback is as follows:

1. The documents subpoenaed are required records, citing United States v. Grosso, 390 U.S. 62, 67-68 (1968) Shapiro v. United States, 335 U.S. 1, 32 (1948); Grand Jury Proceedings, 601 F.2d 162, 168 (5th Cir. 1979); In re Grand Jury Subpoena, 21 F.3d 226 (8th Cir. 1994). The claim is that the regulatory scheme for the FBARs and document requirements is type of valid administrative system making the underlying documentation required to be maintained required records. The Government does seem to overstate its support for that required record argument with cases such as United States v. Sturman, 951 F.2d 1466, 1486-87 (6th Cir. 1992), that do not deal with the records but the Bank Secrecy Reporting Act reporting provisions, holding that the requirement to report does not implicate the Fifth Amendment. That is a different issue, I think.

2. The documents' existence and possession (or availability to possess) are a "foregone conclusion" so as to mitigate any testimonial aspects of the act of production, citing See Fisher v. United States, 425 U.S. 391, 411 (1976); United States v. Bright, 596 F.3d 683, 692 (9th Cir. 2010); United States v. Norwood, 420 F.3d 888, 891 (8th Cir. 2005).

Since I have dealt previously with the foregone conclusion issues (although readers might also want to look at the Bright case cited by the Government), the purpose of this blog today is just to alert practitioners where the Government is headed with respect to the required records exception. I have only done a little research on the issue of the required records exception. I do, however, put out the following quote for practitioners' further thought. The quote is from Akhil Reed Amar and Renee B. Lettow, Fifth Amendment First Principles: The Self-Incrimination Clause, 93 Mich. L. Rev. 857, 872-873 (1995), which contains a good summary of the law to the date of the article (I don't think much that is fundamental has happened since), concluding that there is little principled articulation of the exception. The authors' concluding thoughts are:

The inconsistency of these cases is striking and revealing. The Court hems and haws and then often holds that the privilege does not apply at all: the government often needs information for nonpenal purposes and should not be forced to let criminals go free to get it, the Court intuits. The Court is understandably reluctant to apply the privilege in a heinous crime such as child abuse; granting use plus use-fruits immunity would make it difficult, and in some cases (including the hit-and-run) almost impossible, to prosecute. But that is what Kastigar [Kastigar v. United States, 406 U.S. 441 (1972)] currently demands. Unable to live with that result, the Court zigs, zags, and balances, ad hoc. But the language of the Self-Incrimination Clause does not balance: it states a bright-line rule. Is it possible that if immunity were narrower than Kastigar indicates, judges could indeed live with the logic of the bright-line rule?

In any event, the takeaway from this is that those taxpayers with offshore financial accounts who do not cave when the Government comes knocking are likely to face a subpoena of the type quoted above. I think the outcome of the ensuing fights is now to close to call.