October 2012 Archives

Foreign Bank Accounts and the Failure to File Foreign Bank Account Reports (FBARS) May Be the Death Knell of the 5th Amendment

October 23, 2012,

The Fifth Circuit Court of Appeals ruled that offshore bank account records sought in a criminal tax investigation (related to a suspected failure to file Foreign Bank Account Report, TDF 90-22.1, i.e. FBAR) must be turned over to the IRS despite the fact that turning over those records would have incriminated the witness. The grand jury subpoena issued to the witness required him to produce any records required to be maintained pursuant to the Bank Secrecy Act including records reflecting the names on the offshore bank accounts, and the maximum value of the account. The witness was an individual in Texas who was the target of a grand jury investigation seeking evidence he had used secret Swiss Bank accounts to engage in tax evasion. The IRS already knew based upon records it received from UBS that the witness held offshore bank accounts.

To lay people, and even to most tax attorneys this was a startling result. Actually it would have been more startling, but for the fact that the Fifth Circuit Court of Appeals was the third Circuit Court of Appeals to hold that the Bank Secrecy Act which requires the filing of FBARs trumps the 5th Amendment of the U.S. Constitution. The Fifth Circuit, thus joined the 9th Circuit and the 7th Circuit which issued similar rulings in the last year.

The rulings rely on the "Required Records Doctrine." This is a rather arcane concept which I suspect even some criminal tax attorneys were not familiar with. To vastly oversimplify, the argument goes like this. The 5th Amendment only prohibits compelled testimony; therefore compelling someone to produce records that are voluntarily kept does not violate the 5th Amendment. The witness argued that the mere act of turning over the records was tantamount to compelled "testimony" since by turning over the records the witness was "testifying" as their existence, and also admitting that he knew about the foreign accounts. In addition, maintaining the documents in question are not voluntary since the Bank Secrecy Act "compels" one to keep certain records. Indeed it is a crime not to keep the records.

The Supreme Court has said however that the privilege against self-incrimination does not bar the government from imposing record-keeping and inspection requirements as part of a valid regulatory scheme. The doctrine first arose in the context of a wholesaler of fruit who was required to turn over certain records he was obligated to keep pursuant the Emergency Price Control Act. The Supreme Court explained in a later case that there are three prongs of the Required Records Doctrine. The records must be:

  1. Essentially regulatory

  2. Customarily kept; and

  3. Have public aspects.

The witness argued that the true purpose of the Bank Secrecy Act was to combat criminal activity, and not simply to regulate the use of foreign bank accounts. That argument was rejected. The 5th Circuit also held that the records were of a type "customarily kept," and that they had acquired public aspects by virtue of the fact that the Treasury Department shares information it collects with other agencies. In the words of the Fifth Circuit: "That this data sharing is designed to serve an important public purpose sufficient to imbue otherwise private foreign bank account records with public aspects is not difficult to imagine."

What is difficult to imagine is why the Courts are willing to throw away an important Constitutional safeguard for the sake of catching of few criminal tax cheats.

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California Tax Lawyer Enjoined From Providing Tax Advice or Preparing Tax Returns

October 10, 2012,

San Diego tax attorney Scott Waage was enjoined from preparing tax returns or giving tax advice pursuant to an injunction entered by a federal district court. The injunction had been sought by the Department of Justice in a complaint filed in the Southern District of California pursuant to Internal Revenue Codes Sections 7401, 7402 and 7408.

In its complaint the Department of Justice alleged that tax lawyer Waage along with CPA Robert O. Jensen promoted tax fraud schemes to clients that illegally reduced the client's reported income by, among other things, using sham consulting companies, and illegally structured employee benefit and pension plans. According to the complaint, Waage operated under the names of "The Tax Advisors Group, Inc." and "Pensions by Design." Apparently in his promotional materials tax lawyer Waage referred to himself as a "visionary tax attorney," and a seasoned tax litigator. Currently if you try to click on Waage's website at www.strategiclawgrouppc.com a message pops up that the site has been "disabled."

According to the Department of Justice press release CPA Jensen had been enjoined in March from preparing tax returns that understate income. It makes one wonder why the Department of Justice needed an injunction to prevent CPA Jensen from preparing tax returns that understate income! I always assumed that CPAs (as well as tax lawyers and enrolled agents for that matter) were already not supposed to understate income. Still the IRS uses the injunction process as a convenient, and relatively quick method of putting a tax preparer out of business; and sometimes as an alternative to a criminal tax prosecution. However, in some cases the IRS uses an injunction as a stop gap measure while it puts together its criminal tax case.

Tax attorney Waage is apparently no stranger to IRS tax problems. According to a summons action filed against him in 2008, Waage's law firm was under investigation for its federal income tax liabilities. U.S. v. Waage.

The injunction order against Waage also requires him to provide the IRS a list of his clients that have used his services since 2001. It is likely that those clients will be receiving tax audit notices from the IRS in the not too distant future. Even though the normal statute of limitations for income tax returns is only 3 years, in the case of tax fraud the statute of limitations is open indefinitely, and there is case law supporting the view that tax fraud includes tax fraud by the tax return preparer, nor merely the taxpayer.

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