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From Banking and Finance Law Daily, March 4, 2016

IRS can subpoena foreign account records for tax liability purposes

By Richard A. Roth, J.D.

The U.S. Court of Appeals for the First Circuit has joined seven other U.S. appellate courts in deciding that the Fifth Amendment privilege against self-incrimination does not prevent the Internal Revenue Service from demanding that a taxpayer produce records of his foreign bank accounts. According to the court, the Required Records Doctrine allows the government to subpoena records that must be kept under the Bank Secrecy Act and implementing regulations as long as the recordkeeping requirements have purposes in addition to the enforcement of criminal laws (U.S. v. Chen, Feb. 29, 2016, Lynch, S.).

The Required Records Doctrine says that the Fifth Amendment does not protect an individual from government demands that records be produced if the creation and maintenance of those records is “required as a condition of voluntarily engaging in a highly regulated activity.” There is a three-part test:

  1. The government’s purpose in demanding the records must be essentially regulatory.
  2. The information in the records must be of a type the regulated individual customarily would keep.
  3. The records must have “public aspects” that make them analogous to public records.

Activity not inherently criminal. The argument focused on the first step. The court noted that the government conceded it could not rely on the doctrine to impose recordkeeping requirements on activity that was usually or always criminal.

However, there is nothing inherently criminal in maintaining a foreign bank account, the court pointed out. Many people have foreign accounts for legitimate purposes, and an individual can comply with the BSA recordkeeping duties without being a criminal. The fact that Congress considered the usefulness of the records for criminal enforcement purposes when it passed the BSA does not mean the act was “a backdoor attempt to get at a selected group engaged in illegal activities.”

Government’s justification. The individual’s argument that the government had to prove that he had BSA-required documents before compelling him to produce them was rejected as well. The IRS agent’s affidavit that was used to obtain the subpoena said that the agency had documents that “pointed to” the existence of foreign accounts and that the records were needed to determine if there was any tax liability. That was enough to satisfy the minimal burden imposed on the agency.

Other appellate courts. Other appellate court decisions reaching the same conclusion include:

Notably, the Supreme Court denied a request that it review the Eleventh Circuit’s decision, in In re: Grand Jury Proceedings No. 4-10 v. U.S., No. 12-1409.

The case is No. 14-2003.

Attorneys: William J. Lovett for Zhong H. Chen. Alexander P. Robbins, U.S. Justice Department.

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