Third Circuit holds that the IRS can compel production of foreign bank records over a Fifth Amendment assertion

Third Circuit holds that the IRS can compel production of foreign bank records over a Fifth Amendment assertion The Court of Appeals for the Third Circuit in U.S. v. Chabot, 2015 WL 4385279 (3rd Cir. 2015) affirmed a New Jersey District Court decision and held that the "required records" exception to the Fifth Amendment privilege against self-incrimination applies to allow the IRS to enforce a summons of foreign bank account records. Background 31 CFR 1014.420 requires a taxpayer to file a Report of Foreign Bank and Financial Accounts (“FBAR”) to report financial accounts in foreign countries where the aggregate of such accounts exceeds $10,000. The Fifth Amendment states that "[no] person... shall be compelled in any criminal case to be a witness against himself." An individual may claim this privilege if compelled to produce self-incriminating, "testimonial communications." The act of producing documents may trigger the Fifth Amendment privilege. Fisher v. U.S., 425 U.S. 391 (1976). But there is an exception to the 5th Amendment called the “required records exception.” This exception states that when records are required to be maintained for a legitimate purpose, the 5th amendment does not apply to such records. In Shapiro v. U.S., 335 U.S. 1 (1948), the Supreme Court held that the Fifth Amendment privilege is not abrogated by requiring that taxpayers maintain records as long as the records closely served the purpose of a valid, civil regulation. As set forth in Grosso v. U.S., 390 U.S. 62 (1968), three prongs must be met to fall within the required records exception: (1) the reporting or recordkeeping scheme must have an essentially regulatory purpose; (2) a person must customarily keep the records that the scheme requires him to keep; and (3) the records must have "public aspects." The Chabot case. IRS issued summonses to Mr. and Mrs. Chabot requesting documents required to be maintained under 31 CFR 1014.420. The Chabots refused claiming the 5th Amendment privilege. The New Jersey District Court ruled that the summonses were proper under the required records exception and the Third Circuit just affirmed. The Third Circuit analyzed the three Grosso prongs and determined all three were met. Conclusion For anyone still holding assets abroad without disclosing them, be aware that the IRS may obtain the records through summons enforcement. As such, such taxpayers should consult counsel and strongly consider entering into either the offshore voluntary disclosure program or the streamlined program.

Innocent Spouse Taxpayer Recovers Litigation Costs by Making a “Qualified Offer” and Then Prevailing in Court

Innocent Spouse Taxpayer Recovers Litigation Costs by Making a “Qualified Offer” and Then Prevailing in Court The Court of Appeals for the Ninth Circuit, reversed the Tax Court in Knudsen v. C.I.R., 116 AFTR 2d ¶2015-5051 (9th Cir. 2015) finding that Taxpayer was a prevailing party eligible to recover reasonable litigation costs. The Ninth Circuit determined that she was entitled to an award of costs as a "qualified offer" because she offered to settle her tax liability, the offer was not acted upon and her ultimate liability was zero. Innocent spouse (equitable relief) - background Each spouse is liable jointly and severally for the tax, interest, and most penalties when they file a joint return. Code §6015(f) permits equitable relief to a requesting spouse if, taking into account all of the facts and circumstances, it is inequitable to hold the requesting spouse liable. Litigation costs - background. Under Code §7430, taxpayers who prevail against the U.S. in court may be awarded reasonable litigation and administrative costs unless the IRS's position is substantially justified (Code §7430(c)(4)(B)), or the taxpayer fails to substantiate his claim for reasonable litigation costs. But a taxpayer may also make a qualified offer (“QO”) under Code §7430(g)(1) to settle a tax controversy. If that offer is rejected by the IRS and the amount of the QO is greater than the taxpayer's ultimate liability, will be treated as a prevailing party. Using the QO, the taxpayer's qualification as a prevailing party does not depend on whether IRS's position was substantially justified or whether the taxpayer substantially prevailed in the proceeding. Ninth Circuit reverses. The Ninth Circuit Court found that its decision to grant costs to the taxpayer was consistent with the purpose of the QO, that is: to encourage settlements by imposing costs on the party who was unwilling to settle. Conclusion. The use of the QO tool is one that all tax practitioners should have in their arsenal to use to even the playing field when sometimes it seems the Government has endless funds to fight the taxpayer.