At virtually every turn, courts have ruled against taxpayers who have asserted their Fifth Amendment privilege against self-incrimination to avoid turning over foreign account records to the government, citing the “Required Records Doctrine.” In a recent enforcement action in the U.S. District Court for the District of Oregon, the taxpayers tacked differently. In Cheri LaRue et vir v. United States, No. 3:15-cv-00705, the taxpayers tried to quash an IRS Formal Document Request (“FDR”) for “foreign trusts, entities, and accounts connected to the federal income tax liabilities of Petitioners for 1997 through 2009 and 2011 through 2013.” They argued, among other things, that they were “not in possession, custody, or control of any documents located outside the United States that are responsive to the Formal Document Request,” that they had “not had an interest in any foreign bank account, foreign brokerage or security account, ownership of a foreign entity or structure, or a foreign trust in at least the last five years,” and that turning over such information would violate their Fifth Amendment privilege against self-incrimination.
On December 22, 2015, the district court issued its decision. It dealt with the taxpayers’ lack-of-possession argument fairly quickly on burden-of-proof grounds. One might expect the court also to have disposed of any Fifth Amendment argument quite quickly by citing the Required Records Doctrine. The taxpayers were clever, though, in that they carefully pointed out that for the last five years, they had had no interest in any of the offshore vehicles at issue. Why did five years matter, when the IRS sought documents going back to 1997? The answer is that the regulations promulgated under the Currency and Foreign Transactions Reporting Act of 1970, commonly (but nonsensically) called the Bank Secrecy Act (“BSA”), only require holders of foreign accounts to maintain records of their foreign accounts going back five years:
31 C.F.R. §1010.420 Records to be made and retained by persons having financial interests in foreign financial accounts.
Records of accounts required by §1010.350 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.
Since the regulations only require one to maintain records of the last five years, the Required Records Doctrine is unavailable to the IRS for records that are older than five years. So the IRS would appear to be out of luck. The DOJ Tax Division attorneys who litigated the case on behalf of the IRS came up with a trump card, though. They cited the “Foregone Conclusion Exception” to the Fifth Amendment privilege against self-incrimination, and this carried the day. The court cited a line of cases in holding that “Where the existence and location of the [account records] are a foregone conclusion and the taxpayer adds little or nothing to the sum total of the Government’s information by conceding that he in fact has the [account records], enforcement of the [Formal Document Request] does not touch upon constitutional rights.” Here, the IRS was able to show that it already knew a great deal about the taxpayers’ records and that the taxpayers’ act of producing the records (as opposed to the records themselves) would add little to the government’s case. Continue Reading