How the Bank Secrecy Act of 1970 (“BSA”) Affects Expats with Tax Trouble

5th amendment fbar tax and the Bank Secrecy ActThere has been some confusion in the past on how and if the 5th Amendment can help protect US expats who do not fully disclose their offshore accounts. But recent court action has again shown US citizens (or residents) how aggressive and persistent the IRS can be when it comes to collecting taxes even if they are living abroad.

IRS regulations requires that US expats with offshore accounts, including mutual funds, brokerage accounts, trusts or other types of foreign financial accounts valued in excess of $10,000 must complete the Report of Foreign Bank and Financial Accounts (FBAR) Department of Treasury FinCen Form 114. These forms must be completed and filed by June 30th every year to remain in compliance. The IRS does not grant extensions to file theses forms.

Can U.S. Expats Plead Using the 5th Amendment?

The Case about United States v. Chabot (D.N.J. 2014)

Briefly, the Court upheld the petition to enforce an Internal Revenue Service (“IRS”) summons compelling Eli and Renee Chabot to produce all documents concerning any foreign bank accounts that were required to be maintained by the Bank Secrecy Act of 1970 (“BSA”) and regulations under that Act.

It all started when, on or around April 6, 2010, the IRS received information from the French competent authority regarding Pelsa Business Inc. (“Pelsa”) accounts at HSBC for the years 2005-2007. According to the information provided, Eli Chabot is the beneficial owner of Pelsa. This is pursuant to the United States-France income tax treaty that provided information concerning U.S. Persons maintaining undisclosed bank accounts at HSBC bank.

Following receipt of this information, the IRS issued an administrative summons requesting that the Chabots appear to testify. On May 12, 2012, the Chabots appeared and, on the advice of their attorney, asserted their Fifth Amendment privilege and refused to answer any questions from the IRS regarding foreign bank accounts. Thereafter, the IRS filed several petitions requesting the Chabots give testimony and produce extensive documents about foreign bank accounts. The Chabots continued to assert their 5th Amendment right.

After years of pursuing the Chabots, the IRS urged the Court to adopt the reasoning of six federal courts of appeal in finding that foreign bank account information requested under the Bank Secrecy Act, (BSA) including under 31 C.F.R. § 1010.420, falls within the Required Records Doctrine. The Court granted the Government’s petition to enforce the IRS summons served on Respondents.

Bottom line: The Chabots were not able to rely on the 5th Amendment to avoid disclosure of their bank account records and to protect their rights against self-incrimination. Expats need to be aware that they cannot hide behind the 5th amendment, but that they have other options to deal with the IRS and offshore bank accounts.

Offshore Voluntary Disclosure Program (OVDP): A Practical Option

The U.S. Department of Justice recently informed taxpayers of the new Voluntary Disclosure Program (OVDP). This new program requires that foreign financial institutions disclose to the IRS the names and account details of all current and former account holders of expats living abroad or who have offshore accounts. This puts US expat account holders at immediate risk for IRS investigation and subject to severe criminal penalties including high fees and possible jail time.

If the IRS can show that an expat had knowledge of FBAR regulations and did not comply, they can impose heavy fines and even a jail sentence in some cases. Therefore, it’s important that you approach the IRS before they find you, to reduce some of the fees and avoid possible jail time.

For these reasons, it’s important that US expats seek tax reporting advice from a US tax attorney who can diligently provide sound advice to those facing tax problems. Expats in trouble with the IRS need someone to vigorously represent them in an IRS tax examination, or in litigation if it goes that far. When you retain a US tax attorney, you will be able to understand and protect your rights to obtain the best possible outcome in your situation.