As a US citizen or permanent resident, you are forgiven for the belief you have the right to remain silent.
“Pleading the fifth” (amendment), is such common chorus in American culture, it's near cliché by now. We hear it on television, from every tv cop to the real-time reports on testimony from gangsters, disgraced bankers and bureaucrats alike.
Even grade schoolers know the Constitution reads, in part, “No person shall be compelled in any criminal case to be a witness against himself ”
This applies to taxes too, right?
Not so fast.
For proof, look at Lois Lerner, former head of the IRS Exempt Organizations Unit. Congress subpoenaed Lerner to testify after evidence emerged her unit had targeted conservative non-profit organizations. In each of her appearances, she invoked her Fifth Amendment right against self-incrimination.
Unfortunately, when it comes to tax returns or other financial disclosures to the US government, you don’t have the same right.
The reason is, written records – or written submissions – are subject to a lower degree of protection than oral testimony.
But how could this be?
In the landmark prohibition era case, United States v. Sullivan, the Supreme Court declared a taxpayer whose primary source of income was gains from the illegal sale of liquor still had to file a tax return, despite the potential for self-incrimination. Al Capone himself felt the pinch from this law.
Moreover, in cases where taxpayers have sought to invoke the Fifth Amendment, the IRS has repeatedly applied the obscure “required records doctrine.”
This doctrine stems from another Supreme Court decision, Shapiro v. United States. In this Protected content , the court declared the government can require individuals engaged in “regulated activity” to maintain certain records and produce them on demand.
Then, just to make sure everyone got the point, in Protected content United States v. Doe, the Supreme Court declared, “[T]he Fifth Amendment provides absolutely no protection for the contents of private papers of any kind.”
So, if the IRS demands that you release records the law requires you to keep, you must release them or face contempt charges. The IRS may then use those records against you in a civil or criminal proceeding.
The required records doctrine is particularly important in the context of offshore investments. In at least seven recent cases, the IRS has successfully persuaded courts to invoke this rule to force taxpayers to deliver to it records of their alleged non-US investments. Taxpayer’s claims that the records could be used against them fell on deaf ears.
What about records that a third party, such as an offshore bank, holds that may incriminate you? Thanks to a pair of Supreme Court decisions, California Bankers Association v. Shultz and United States v. Miller, they’re not protected either. Prosecutors can issue broad summonses compelling custodians of personal and financial records to retrieve data that matches whatever criteria the government stipulates. Such “John Doe summonses” are widely used in offshore tax investigations.
Then of course there’s FATCA – the Foreign Account Tax Compliance Act. Due to FATCA, the IRS now routinely receives information about US taxpayers’ offshore financial dealings. Since this information now comes to the IRS on a silver platter, it doesn’t even need you to produce records of your offshore dealings to prosecute you if you don’t declare them. But if you don’t give them the records, it can ask a court to hold you in contempt for failing to produce them as “required records.”
Now you know who the boss is when it comes to the Fifth Amendment. It’s definitely not you Or the constitution.
Are you tired of the erosion to your rights at the hands of government agencies? Too bad – as long as you remain a US citizen or permanent resident, you must comply with whatever written disclosures the IRS and other governmental busybodies demand.
There is an “escape hatch,” but it’s not for the faint of heart. If you’re prepared to acquire a second citizenship and passport, leave the US for good, and give up US citizenship or permanent residence, you’ll have no further tax or disclosure obligations to the IRS, other than for some types of US-source income.
Of course, you’ll want to choose a country with a less oppressive tax system than the US. Panama is a popular choice – it imposes tax only on income generated within the country. Income from outside Panama generally isn’t taxed at all.
Expatriation – giving up US citizenship or permanent residence – is an irrevocable decision that no one should make lightly. But given the IRS vendetta against all things offshore, it’s an option an increasing number have considered.