Saturday, November 7, 2015

Tax Court Rejects the Frivolous Return Penalty for Fifth Amendment Assertion on Schedule B FBAR Question (11/71/5)

In Youssefzadeh v. Commissioner, Order (11/6/15), here, on Schedule B for 2011, the taxpayer "refused to answer some questions and fill in some values."  Instead, he "invoked his Fifth Amendment privilege against self-incrimination, and wrote that if (sic) his answers to these questions might lead to (or actually be) incriminating evidence against him.."  Later in the order, the Court says that the taxpayer "did black out the source and amount of some interest on Schedule B, but importantly, he included the total amount of interest on line 4."

The IRS asserted a frivolous return penalty under § 6702(a), here.

The taxpayer contested the penalty in a CDP proceeding.  The Tax Court held that he had properly invoked his Fifth Amendment privilege and therefore rejected the IRS's assertion of the frivolous return penalty.

Although this is a nonprecedential order, the discussion of this issue often faced by tax practitioners is very good.  The issue is how does the taxpayer properly invoke his or her Fifth Amendment privilege when some information on the tax return may be potentially incriminating.  In broad strokes, the taxpayer cannot assert the Fifth Amendment privilege by filing no return.  Nor can he assert the privilege by filing a return with no information other than identifying information and the assertion of the Fifth Amendment claim.  Rather, as I stated in the last version of my Federal Tax Crime book (footnotes omitted:
From the above, we derive the conclusion that generally, the proper way to assert the Fifth Amendment on current returns is to selectively assert it on the return in response to the line item requesting information that may be incriminating.  Certainly line items on the return that require disclosure of a source of income or a type of business (as in Schedule C) might permit the assertion of the Fifth Amendment to avoid answering the question.  What about the amount of the income?  Any lawyer worth his or her pay can provide reasons, often tenuous, as to why putting the amount of income would be incriminating even if the Fifth Amendment is asserted as to the source.  But the amount of income is usually not thought of as the quality of information that is incriminating for Fifth Amendment purposes. fn
   fn. E.g., United States v. Goetz, 746 F.2d 705, 710 (11th Cir. 1984); United States v. Brown, 600 F.2d 248, 252 (10th Cir. 1979), cert. denied, 444 U.S. 917 (1979); United States v. Johnson, 577 F.2d 1304, 1311 (5th Cir. 1978).
I am not sure that I picked up all nuances in this concluding statement and Youssafzaeh may be offer some nuance.  So, I include here significant portions of Judge Holmes' Order because it is short, touches all the right bases, and well-stated:

The Commissioner must find three things to assess a frivolous return penalty. First, the document must purport to be a tax return. I.R.C. § 6702(a)(1). Second, the return must either omit enough information to prevent the IRS from judging "the substantial correctness of the self-assessment" or must clearly appear to be substantially incorrect. I.R.C. § 6702(a)(1)(A)-(B). Third, the taxpayer's position must be frivolous or demonstrate a desire to impede the IRS's administration of the Code. I.R.C. § 6702(a)(2)(A)-(B). We limit our review to the face of the return when deciding if the return was frivolous as a matter of law. Callahan, 130 T.C. at 51. The burden of proof is on the Commissioner when he asserts a penalty under I.R.C. § 6702. I.R.C. § 6703(a). 
We can easily check factor one off the list. Youssefzadeh filed the standard Form 1040 and we have no problem saying he meant it to be his tax return (nor does the Commissioner contest this). The second factor isn't so easy, but after examining the face of the return, we ultimately hold that it contained sufficient information. The face of Youssefzadeh's return includes all of a normal return's numerical information -- he's not one of those tax protesters who fills out a return with zeroes on nearly every line. See, e.g., Lindberg v. Commissioner, 99 TCM 1273, 1277 (2010); Hill v. Commissioner, 108 TCM 12, 14 (2014). He did black out the source and amount of some interest on Schedule B, but importantly, he included the total amount of interest on line 4. There don't appear to be any other irregularities. 
The Commissioner argues that he needs the missing information to determine if Youssefzadeh's return is accurate, but he fails to give any reasons why. And it's important that the standard isn't "Is the return completely correct?" but "Is the return substantially correct?" We hold that this return on these undisputed facts is -- considering that the face of the return appears to include the total amount of interest while only redacting the source of one payer. 
The Commissioner stumbles into the third factor too. He argues that Youssefzadeh's return is frivolous because the IRS has identified claiming the Fifth Amendment as a reason for omitting information is a frivolous argument. Notice 2010-33, 2010-17 I.R.B. 609. Therefore, the Commissioner argues, Youssefzadeh's return must've been frivolous. But Notice 2010-33 doesn't say omitting some information because of fear of self-incrimination is frivolous; it says that omitting "all financial information" is frivolous. Id. (emphasis added). This distinction is important and appears elsewhere. The Internal Revenue Manual says it's frivolous when an "individual makes an improper blanket assertion of the Fifth Amendment right against self-incrimination as a basis for not providing any financial information." I.R.M. (emphasis added). The Manual goes on to say that "judicial precedents clearly establish that failure to comply with the filing and reporting requirements of the federal income tax laws will not be excused based upon blanket assertions of" the Fifth Amendment. I.R.M. (emphasis added). A review of Youssefzadeh's return reveals that it contains plenty of financial information and isn't covered by any blanket assertions. 
The Supreme Court held a long time ago that the Fifth Amendment doesn't excuse a complete failure to file a tax return. United States v. Sullivan, 274 U.S. 259, 263 (1927). But the Court went on to say in the same opinion that if the form "called for answers that the defendant was privileged from making he could have raised the objection in the return." Id. It later specifically held the privilege does apply to tax returns, provided the taxpayer affirmatively claims the privilege on the return and does so before he files it. Garner v. United States, 424 U.S. 648, 656 (1976). The Commissioner's assertion without further analysis that a claim of the Fifth Amendment privilege on a return must in all cases be frivolous is simply wrong. 
The law doesn't let taxpayers invoke the privilege on a tax return with random and unjustified invocations. Instead, he "must be faced with substantial hazards of self incrimination * * * that are real and appreciable." United States v. Neff, 615 F.2d 1235, 1239 (9th Cir. 1980) (internal quotations omitted). He must have "reasonable cause" to fear that answering a question on a tax return could lead to criminal prosecution. Id. But the answer doesn't have to be so incriminating that it supports conviction itself. Id. All the answer has to do is "provide a lead or clue to evidence having a tendency to incriminate." Id. 
At the same time, a taxpayer must show enough to allow us to conclude that there is at least a risk of self-incrimination (while at the same time not revealing enough information to realize the very risk the taxpayer is trying to avoid). Hoffman v. United States, 341 U.S. 479, 486 (1951). We first determine if we find "a real and appreciable danger of incrimination exists" by examining the "implications of the questions(s) in the setting in which (they are) asked." Neff, 615 F.2d at 1239-40. If we aren't convinced, then it's up to the taxpayer to show us why we're wrong. Id. 
Youssefzadeh correctly tells us here that 31 U.S.C. § 5314 and 31 U.S.C. § 5322 make it a crime to willfully fail to file an FBAR.1 The questions asked on Section B of the Form 1040 elicit information that can easily be used to determine if the taxpayer has filed an FBAR. And, as the Sixth Circuit pointed out, "this section of the return refers taxpayers to a booklet that further outlines their responsibilities for reporting foreign bank transactions. This booklet discusses the duty to file [the FBAR]." United States v. Sturman, 951 F.2d 1466, 1477 (6th Cir. 1991). Because the lines that Youssefzadeh redacted ask for information that triggers the duty to file an FBAR, n2 and because willful failure to file an FBAR is a crime, we hold that Youssefzadeh has shown us a real and appreciable danger of self-incrimination by being compelled to answer the questions on Section B. In other words, Youssefzadeh's return wasn't frivolous by reason of invoking the Fifth Amendment privilege. Because the Commissioner raised no other grounds for imposing the penalty, we hold that Youssefzadeh's return wasn't frivolous or made with an intent to impede the administration of the code.
   n2 Question 7a on Form 1040 asks the taxpayer if he or she is required to file an FBAR. If the taxpayer is forced to answer this as "yes" but has failed to file an FBAR, the answer at least reasonably raises the threat of criminal prosecution.  
We cannot sustain the penalty, which means that we cannot sustain the Commissioner's determination to collect it.

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