Most adults in the United States are familiar with the Fifth Amendment’s protection against forced self-incrimination. The protection is a part of the Bill of Rights and is typically associated with those who are called to take the witness stand. But a courtroom isn’t the only place that a person can incriminate himself or herself and a taxpayer recently won a huge case in the Tax Court with regard to omitting portions of their return because of potential criminal Foreign Bank Account Reporting (FBAR) implications.

Many taxpayers are unaware that when they sign their tax return each year, they are doing so under penalty of perjury. In other words, signing your name on a return can be akin to testifying on a witness stand that everything that is written on the return is true and accurate. Thus, when a taxpayer gets to his or her Schedule B, which asks several questions with regard to sources of interest and whether the taxpayer was required to file an FBAR for the year, he or she could be incriminating himself or herself by stating that interest received came from an undeclared account at a foreign bank.

To avoid incriminating himself, Youssef Youssefzadeh included all of the interest that he had received from his worldwide accounts on his individual return’s Schedule B, but left identifying information about the bank blank because it was his position that providing the name of a foreign bank could lead the IRS to determine that he had not filed the requisite FBAR disclosures and thus would incriminate himself.

The IRS dealt with a fair amount of taxpayers who choose not to complete part or all of their tax return for one reason or another. One of the more popular excuses for leaving a tax return mostly or completely blank is that “taxes are unconstitutional”. To battle those and similar situations, the IRS took the position that positions of taxpayers that are deemed frivolous by the Service can be punished by an increased penalty under §6702(a) of the Internal Revenue Code. In the past, the Service has utilized their “frivolous penalty” when a taxpayer fail to provide information on their return because it would violate their right to be protected from forced self-incrimination.

So it is no surprise that when Youssefzadeh omitted important information about the source of his bank account interest, the IRS was not receptive. The revenue agent auditing Youssefzadeh’s return asked him to provide the information that Youssefzadeh considered to be incriminating. When he refused, collection proceedings were initiated and at an IRS appeals meeting, the appeals officer determined that the position of the revenue agent was correct and that the frivolous position penalty was correct as the information was omitted based on a Fifth Amendment argument. Youssefzadeh took his argument to the Tax Court.

In agreeing with the taxpayer, the tax court determined that although the “frivolous position” penalty imposed by the IRS is legal in theory, its application in Youssefzadeh’s case was not. The Tax Court performed a three part analysis to determine whether the taxpayer’s position was frivolous and determined that although Youssefzadeh’s document did purport to be a tax return, it failed the second and third prongs which require that the omitted information by the taxpayer be so substantial that the IRS would be unable to judge substantial correctness and that the taxpayer’s position must be frivolous or demonstrate a desire to impede the administration of the tax code.

The Tax Court reasoned that Youssefzadeh provided what he purported to be his entire worldwide interest income and only omitted the names of the banks. Simply omitting the names of the foreign banks was not enough of an omission to prevent the IRS from determining whether the taxpayer had complied with his tax reporting. Finally, the Tax Court agreed that Youssefzadeh didn’t intend to impede the administration of the tax code and was simply trying to avoid incriminating himself. Therefore, the Tax Court struck down the frivolous position penalty.

So should every taxpayer with an undeclared foreign bank account omit information on his or her tax return to avoid self-incrimination? Probably not. Truthfully, a lot of harm can come from intentionally omitting information from a tax return. For one, it will likely flag your return to be reviewed by a revenue agent. Even if you are able to escape a frivolous position penalty like Youssefzadeh, this IRS will then be aware that there is something that you are hiding and will follow up to determine what it is.

Youssefzadeh likely won’t be protected from a criminal prosecution for failing to file documentation as required by FBAR laws. Although the Service cannot force him to disclose the name of his foreign bank on his tax return, knowing that one exists will make it easier for them to track down more information about it. The Foreign Account Tax Compliance Act and Swiss Bank Program have produced several avenues by which the U.S. government is receiving account information about U.S. residents holding money in foreign countries.

In the end, if you are a U.S. resident with a undeclared foreign bank account, you should speak with an experienced tax attorney right away. There are many options that may allow you to eliminate or mitigate the negative repercussions of being investigated or prosecuted for willfully maintaining an undisclosed foreign bank account.

Contact an Experienced Tax Attorney

The tax and accounting professionals at the Tax Law Offices of David W. Klasing have assisted taxpayers in a plethora of tax-related issues including determining the right course-of-action with regard to clients with undeclared foreign bank accounts. Many taxpayers will opt to stand by and wait for the government to open an investigation, at which point they will try to talk their way out of the situation, which typically results in the government obtaining incriminating statements that can be used at trial against the taxpayer. Let our legal team zealously advocate for your physical and financial freedom. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.