With the 2016 president election campaign season in full swing, politicians’ claims of future executive acts are a dime-a-dozen, as are criticisms of current policy. Unsurprisingly, the issue of taxation is a major talking point among most presidential hopefuls. Whether it is the left advocating taxing the rich at marginal rates higher than current law provides, or the right promoting the equity in a flat-tax regime, everyone seems to have an opinion about the process by which the United States government collects revenue.
Rand Paul, a Republican Senator from Kentucky is no different. According to his campaign website, if he was elected President, he would encourage Congress to throw out the Internal Revenue Code and to implement a flat 14.5% tax that would purportedly close every corporate loophole available to special interests. Paul has also said that he would like to see other taxes, such as those for employment and estate and gift go by the wayside. But unlike any other candidate, he has taken particular aim at the Foreign Bank Account Reporting (FBAR) and Foreign Account Tax Compliance Act (FATCA) legislation. And Paul isn’t just talking about fighting FATCA, he has filed a lawsuit in federal court to prevent its enforcement.
For those who are not aware, the FBAR and FATCA laws were put into place to fight offshore bank secrecy. The FBAR laws require that a taxpayer disclose the existence and information associated with an interest in a foreign bank account while the FATCA laws aim to require foreign financial institutions to hand over identifying information about U.S. account holders and their accounts. In order to assist the process by which foreign banks disseminates information to the IRS (as required by FATCA), the White House and State Department have utilized their role as the executive branch to negotiate and enter into non-binding agreements with other nations. Those agreements (called Intergovernmental Agreements (IGA’s) in the context of taxation) have laid out a specific process that banks within the foreign nation must either transmit the required banking information to the IRS directly or indirectly by using their domestic tax authority as an intermediary.
But before those taxpayers who have undisclosed foreign accounts get too excited, it is important to understand exactly what Paul’s claim is, and once that is accomplished, any hopes of dodging the bullet that is FBAR enforcement will likely fade.
The crux of Paul’s lawsuit is two-fold. First and most importantly, he believes that the government is conducting an illegal search, through the use of a foreign bank, when it gathers sensitive and potentially incriminating information about U.S. taxpayers. The Fourth Amendment prohibits the government from violating your right to privacy unless they have probable cause to do so. It is Paul’s position that when the government forces other nations and their banks to hand over bank account information whenever the financial institution believes that one of their customers is an American, it is doing so without probable cause. In fact, he believes that because the information that is being transmitted is done so automatically (without the U.S. having to inquire about a particular individual), it is impossible for U.S. taxing authorities to have even a reasonable suspicion that illegal activity is occurring. Typically, the government needs reasonable suspicion in order to detain or perform a pat down of an individual, let alone acquire their bank account information.
Paul’s second claim likely was developed specifically to provide him with standing to sue. He claims that because the State Department has entered into several IGA’s without the consent of the Senate, he has been robbed of the ability to vote against them, which according to him is unconstitutional.
So are Rand Paul’s claims full of merit, or will they fall flat? In analyzing Paul’s first claim, it is unlikely that a court will rule that any privacy rights have been violated through the FATCA and FBAR legislation for a couple of reasons. First, Katz v. United States, 389 U.S. 347 (1967) established that a person has Fourth Amendment protection wherever they have a “reasonable expectation of privacy”. Thus, searches that occur inside your home are almost always constitutionally protected, as a residence is legally deemed to be an individual’s most private places and thus, the highest level of privacy is expected. But what happens when your private information is voluntarily shared with someone else? In Smith v. Maryland, 442 U.S. 735 (1979), a police department received warrantless information from a telephone company about the numbers an individual suspected of a crime had dialed over a specific period of time. The Supreme Court ruled that there was no violation of the Fourth Amendment in this case because by dialing a number into a phone, a customer knows that such information is available to phone company employees and thus, a person cannot have a reasonable expectation of privacy in information that is shared with others. The government will likely successfully argue that foreign bank account information that is shared with and freely accessible by a financial institution is not information that taxpayer has a reasonable expectation of privacy with regard to.
The second reason that a court would likely not rule that reporting by a foreign bank of financial information is illegal is the reality that the IRS depends on not only banks to deliver wage and income information, but also on employers, purchasers of services, and various other business entities to do the same. The very nature of our tax system vitally relies on information being sent to the IRS. A court would likely not rule that wage information with regard to tax reporting is a matter of which a taxpayer holds a reasonable expectation of privacy. A ruling to the contrary would throw our nation’s tax system into disarray.
With regard to Rand Paul’s last claim asserting that the executive has overstepped their authority by entering into IGA’s with other nations, the outcome is less certain, but its impact also isn’t as great. The Senate must give their approval before bilateral tax treaties are entered into between nations. Those treaties have typically included terms about information sharing. Since Paul took office, he has used his position on the Senate Foreign Relations Committee to block any tax treaties from being enacted. He believes that the State Department has effectively abrogated the authority of Senate by entering into agreements with other nations that involve the subject matter that is typically reserved for the Senate to ratify. But even if a court determines that the actions of the State Department are unconstitutional, it would merely affect the IGA’s and not FBAR or FATCA laws, leaving the foreign financial reporting requirements in place.
Regardless of the outcome in Rand Paul’s lawsuit against the United States, there is virtually no chance that taxpayers will be off the hook for undeclared foreign bank accounts. With the strides that the government has made in detecting hidden overseas bank accounts, money laundering, identity theft, and even covert terrorism, the idealistic right to privacy that Rand Paul is campaigning for is likely gone for good, leaving FBAR and FATCA laws for individuals and banks to comply with, or face the consequences.
If you have a foreign bank account that hasn’t yet been disclosed to the government, there is still a way out without risking a lengthy prison sentence. The government has created the Offshore Voluntary Disclosure Program, that allows taxpayers to provide the government with information with regard to their foreign account and pay the back-taxes, interest, and penalties associated with it in exchange for an agreement to not criminally prosecute the accountholder. For many, it is the only way to ensure that a secret foreign bank account isn’t the reason that federal prison is a very real possibility.
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience in representing taxpayers that have undeclared foreign bank accounts. Our team will assess your situation and present you with all of your options, as well as provide our advice as to the best route for you to take. When the IRS and Department of Justice comes knocking, they are already prepared for battle. Ensure that when you answer, you have a zealous advocate ready to fight for your freedom. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.