ing and disclosure obligations. Many peo-ple who open such accounts do so withoutthe benefit of competent advice and thenwrongfully fail to make the proper disclo-sures to the IRS and the Treasury. As illus-trated by the not atypical hypothetical de-scribed below, when such a client laterconsults a tax advisor, the practitionermust tread carefully in protecting theclient's legal interest to the fullest extentpossible while at the same time ensuringthat the client-and the advisor as well-commit no new offenses.

A practitioner's legal and ethical responsi-

bilities to the client and to the judicial sys-

tem are tested when the client's past con-

duct collides with annual reporting and dis-

closure obligations for foreign bank

accounts. Often the only acceptable

approach is the explicit assertion of the

privilege against self-incrimination, which

may itself provide an incriminating lead to

an inquisitive investigator.

BANKING IN PARADISE

In the spring of 1996, Richard Smith had a

marvelous vacation on the tropical island

of Azure. While he was there, he attended a

free seminar on offshore banking and in-

vesting, where he heard about the many

benefits of having an Azure bank account,

including the island's strict bank secrecy

laws. Smith opened an account at an Azure

bank and deposited funds over the next

three years. The bank invested his money

and provided him with a "debit" card to

use for "untraceable" cash advances and

purchases. While Smith was careful to re-

port all of his domestic income on his tax

returns for 1996 and 1997, he did not dis-

close the existence of the Azure account or

report the income earned in the account.

OF TAXATION I SEPTEMBER 19~9

In January 1999, Smith received a rou-

tine civil audit notice for 1996 and 1997from the IRS. Nervous about his Azure ac-

count, he consulted his lawyer. She took

some comfort in the fact that Smith was

not skimming cash out of his business, but

she was concerned that the offshore ac-

count might surface during the audit. As

she considered the agent's initial request

for information, Smith sent her a draft

copy of his 1998 return. She noted that in

response to the standard question askingwhether the taxpayer had any foreign ac-

counts, Smith had falsely answered "no:'

Smith's lawyer knew that she could not

advise him to file a false tax return. She also

knew, however, that disclosing the foreign

account and reporting offshore earnings on

Smith's 1998 return might lead the Service

to his false statements and underreporting

of income on prior returns. She also was

aware that Smith was exposed to criminal

sanctions for failing to file annual TreasuryDepartment forms concerning his foreign

account. She pondered her options.

The annual reporting requirements for

foreign bank accounts and the severe sanc-

tions for noncompliance with those obliga-tions create recurring problems for any tax

practitioner who, like Smith's lawyer, en-counters a client with a previously undis-

closed foreign account. In addition to the

client's issues, the practitioner faces the

difficult question of what advice ethicallycan be given to a client who has failed in

prior years to disclose a foreign financial

a u.s. taxpayer, the act of

opening a foreign bank accounttriggers multiple annual report-

SCOTT D. MICHEL is a partner in theWashington, D.C., law firm ofCaplin &Drysdale, Chartered. with a specialty incriminal tax cases. A past chair of theCommittee on Civil and Criminal TaxPenalties of the ABA Tax Section, he has

written and lectured frequently on crim-inal tax issues.

Copyright @ 1999 Scott D. Michel.

158 . JOURNAL

By SCOTT D. MICHEL

A person who opens an account ina tax haven country with the intentionnot to report it to the IRS typically at-tempts to evade this requirement byusing a nominee entity. Financial advi-sors in tax havens often promote"bearer share" corporations for thispurpose. Such a corporation belongsto whomever physically possesses thestock certificates, so there is no officialrecord of ownership. In Smith's case,for example, an Azure solicitor createdthe "RS Corporation" under Azure law,put himself and his office staff on thecorporation's board of directors,opened the account in the corpora-tion's name, and then gave Smith thestock certificates.

There is no question, however, thatSmith is the "beneficial owner" of theaccount in the name of the RS Corpora-tion. He is the sole signatory on the ac-count. He presumably filled out a format the bank identifying himself as thebeneficial owner. The money in the ac-count is his to use as he pleases. Thedebit card issued on the account is inhis name. It is beyond dispute underU.S. tax law that the obligation to reportincome earned on a financial account

159

account when the time comes to filethe current tax return.

DISCLOSURE REOUIREMENTS

The tax and banking laws obligate U.S.

taxpayers to disclose any foreign fi-

nancial account under their control in

a variety of ways. First, the Code re-

quires u.s. citizens and residents to re-

port their worldwide income. Thus, if a

u.s. taxpayer has a bank or brokerage

account in a foreign country and that

account earns interest, dividends, or

capital gains, that income, and a dis-

closure of its source, must appear on

the Form 1040.

1 See, e.g., Chu, TCM 1996-549; Hang, 95 TC

74 (1990); Serianni, 80 TC 1090 (1983), 8ff'd765 F.2d 1051, 56 AFTR2d 85-5559 (CA-11,1985); Hook, 58 TC 267 (1972).

2 See H. Rep't No.91-975, 91st Cong., 2d

Sess., reprinted in U.S. Code Cong. & Ad.News 4394, 4397-8 (1970).

331 U.S.C. section 5314.

431 C.F.R. section 103.24.

attaches to the beneficial owner of thefunds in the account, regardless of thename in which the account is held.1There is no question that Smith shouldhave disclosed the account and report-ed its earnings on his prior returns.

U.S. taxpayers are also subject toadditional requirements, derived fromthe Bank Secrecy Act of 1970 (BSA), toreport their interest in or authorityover any foreign financial accounts.When it enacted BSA, Congress wasconcerned that wealthy Americanswith secret foreign bank accounts wereable to evade income taxes and concealassets, that foreign financial accountswere often linked to other seriouscriminal activity, and that U.S. law en-forcement agencies encountered road-blocks when investigating such offens-es because "wrongdoers cloak theiractivities in the shield of foreign finan-cial secrecy:'2 Congress therefore di-rected the Treasury to adopt regula-tions requiring disclosure of foreignaccounts.3 Pursuant to this mandate,federal regulations require each personsubject to U.S. jurisdiction to make areport on yearly tax returns of any "fi -

nancial interest in, or signature or oth-er authority over, a bank, securities orother financial account in a foreigncountry:'4 The regulations further re-quire the disclosure of information re-lating to such accounts on a separateform issued by the Treasury.

The result of the BSXs directive is adual disclosure requirement. First,since the promulgation of the regula-tions, Form 1040 has contained a ques-tion asking about foreign financialaccounts. On the 1998 return, thequestion appears on Schedule B andreads as follows: "At any time during[ the calendar year] , did you have aninterest in or a signature or other au-thority over a financial account in aforeign country, such as a bank ac-count, securities account, or other fi-nancial account? See [the instructions]for exceptions and filing requirementsfor Form TD F 90-22.1:'The form con-tains boxes labeled "yes" and "no" forthe taxpayer's response. If the answeris "yes:' the form requires the taxpayerto "enter the name of the foreign

country:'The instructions accompanying

Form 1040 make plain that, in general,

1999 .JOURNAL OF TAXATION. SEPTEMBER

a "yes" answer to the foreign bank ac-count question is required if the tax-payer ( 1) at any time during the yearhad an interest in or signatory or otherauthority over a financial account in aforeign country, or (2) owns more than50% of the stock in any corporationthat owns one or more such accounts.There are exceptions to the disclosure re-quirement, such as for accounts valued atless than $10,000 during the entire yearor accounts owned bya publicly tradedor otherwise large corporation where thecompany has disclosed the account.

The second disclosure requirement,alluded to in the question on the Form1040, is Treasury Department Form90-22.1, "Report Of Foreign Bank AndFinancial Accounts" (known as anFBAR, for "foreign bank account re-port"). That form requires the disclo-sure of detailed information about thetaxpayer's foreign accounts, includingthe filer's identity and social securitynumber, and a list of all foreign ac-counts, with account numbers. TheFBAR instructions and definitions de-scribe what constitutes a "financial ac-count:' a "financial interest:' or "signa-ture or other authority:' but in thetypical case like Richard Smith's theobligation to file the FBAR is clear.Even if Smith's account is technically"owned" by the RS Corporation, hissignature authority over the accountby itself triggers the disclosure obliga-tion, regardless of the nature of his fi-nancial interest, as does his financialinterest, standing alone, without regardto the identity of the signatory.

If a taxpayer has a disclosable inter-est in a foreign account at any timeduring the tax year, the FBAR describ-ing that account is due on June 30 ofthe following calendar year, and noextensions are possible. Form 90-22.1 is filed not with the IRS but withthe Treasury's computing center inDetroit.

Other criminal tax sanctions couldapply to the knowing noncompliancewith the foreign bank account disclo-sure requirements. A taxpayer's omis-sion from his return of taxable interest,dividends, or capital gains earned on aforeign account is a separate offenseunder Section 7206( 1) or, if the gov-ernment can prove a tax deficiency, taxevasion under Section 7201. If morethan one individual is involved, thegovernment can-and often does-bring tax-related conspiracy charges.9

In addition to criminal tax charges,the BSA imposes criminal penalties forthe willful failure to file an FBAR.10Any such failure is a misdemeanor,and it is elevated to a felony if the per-son fails to file the form "while violat-ing another law of the United States oras part of a pattern of illegal activityinvolving transactions of more than$100,000 in a 12 month period."11Thus, any knowing failure to file anFBAR that occurs in the context of tax,

.

SANCTIONS FOR NONCOMPliANCE

Both the willful failure to comply with

the disclosure requirements for foreign

financial accounts and the willful fail-

ure to report earnings on such ac-

counts constitute serious criminal of-

fenses and may also trigger severe civil

penalties.The most likely basis for a criminal

prosecution against a taxpayer who

provides a false answer to the foreign

bank account question is Section

7206(1). That statute punishes any tax-payer who " [ w] illfully makes and sub-

scribes any return, statement, or other

document, which contains or is veri-

fied by a written declaration that it is

made under the penalties of perjury,

and which he does not believe to be

true and correct as to every material

matter:' A taxpayer who knowingly

checks the foreign bank account box

"no" when the correct answer is "yes"

obviously would violate this provision.

The Justice Department lists such con-

duct in its Criminal Tax Manual as a

basis for a prosecution under Section

7206(1), and the government has pros-

ecuted individuals in such cases.5

A taxpayer may not avoid these

sanctions by failing to answer the for-

eign bank account question. A willfulfailure to answer "yes" or "no" could vi -

olate Section 7206 ( 1) if the taxpayer

signing such a return knew that the re-

turn was not "true and correct as to

every material matter:'6 There is at

least one reported case in which the

government prosecuted a taxpayer un-

der Section 7206( 1) for failing to re-

spond to the foreign bank account

question.7 Moreover, in other regula-

tory contexts, the government has ob-

tained false-statement felony convic-tions against individuals who leaveblank a request for information on afederal filing. In such cases, a willfulnonresponse is considered a falsestatement.8

AIJVISING THE CLIENT ON CURRENT

FILINGS

Before he consulted his lawyer, Richard

Smith violated a number of federal

statutes. He made false statements on

his 1996 and 1997 tax returns by

checking "no" in response to the for-

eign bank account question. He omit-

ted interest, dividend, and capital gains

earned on the Azure account from the

taxable income reported on those re-

turns. He failed twice to file the re-

quired FBAR.

There is little that Smith's lawyer

can do about her client's prior con-

duct. Filing amended 1996 and 1997

returns or the delinquent FBARs after

the initiation of an IRS audit for those

currency, or money-laundering offens-es can be prosecuted as a separatefelony.12 The government has prose-cuted individuals under the BSA forfailing to file the FBAR.13

Whether the government bringscriminal charges or not, a taxpayerwho fails to disclose a foreign financialaccount or who omits income fromsuch an account on a tax return will besubject to various civil penalties. TheTreasury can impose a civil penalty foreach willful failure to file an FBARequal to the greater of the balance inthe foreign account (not to exceed$100,000 ) or $25,000.14 The IRS caninvoke the full panoply of civil taxpenalties that may apply when a tax-payer omits income from a return, in-cluding the negligence or substantialunderstatement penalties of 20% orthe fraud penalty of 75%.15

5 U.S. Department of Justice, Criminal Tax

Manual, § 12.0816JlgJ. See, e.g., Mueller, 74F.3d 1152, 77 AFTR2d 96-893 (CA-11, 1996);Harvey, 869 F.2d 1439, 63 AFTR2d 89-1212(CA-11, 1989); Franks, 723 F.2d 1482, 53AFTR2d 84-595 (CA-10, 1983), cert. den.See also Hajecate, 683 F.2d 894, 51 AFTR2d83-1282 (CA-5 en banc, 1982), cert. den.(dismissing charges under 18 U.S.C. section1001 for false answer to FBAR questionunder now defunct "exculpatory no" doc-trine but holding that government was freeto prosecute under Section 7206(1)).

6 The failure to answer the foreign bank

account question would also be a violationof Section 7203, which makes it a misde-meanor willfully to fail to supply any informa-tion required under the Code. The govern-

equivalent to making a false statement);Irwin, 654 F.2d 671 (CA-10, 1981), cert. den.(similar holding); McCarthy, 422 F.2d 160(CA-2, 1970), cert. dism. (similar holding).

918 U.S.C. section 371.10 31 U.S.C. section 5322.

11 Id., section 5322(b).

12 The fact that Form 90-22.1 is referred to in

the foreign bank account question onSchedule B of Form 1040 is sufficient evi-dence to permit a jury to infer willfulness.See Sturman, 951 F.2d 1466 (CA-2, 1991),cert. den.

13 See Clines, 958 F.2d 578 (CA-4, 1992), cert.

den.; Sturman, supra note 12.

1431 C.F.R. section 103.47(g)(2).15 Sections 6662, 6663.

ment usually prosecutes such an offense asa felony, however, where the individualinvolved engaged in other allegedly fraudu-lent activity. See Spies, 317 U.S. 492, 30AFTR 378 (1943).

71n Polidori, TCM 1996-514, the taxpayer"left the blocks corresponding to" the for-eign bank inquiry blank. The taxpayer even-tually pled guilty to a violation of Section7206(1 ), and the court upheld the civil fraudpenalty because the taxpayer had concealedhis interest in the foreign accounts. See alsoFranks, supra note 5 (disclosing some butnot all foreign accounts is a violation ofSection 7206(1)).

8 See Mattox, 689 F.2d 531 (CA-5, 1982) (fail-

ing to answer a question on the form forfederal workers' compensation benefits

JOURNAL OF TAXATION. SEPTEMBER 1999160

18 Notwithstanding Azure's bank secrecy laws,

the U.S. government likely could obtainaccess to the records relating to Smith'saccount. The government has been increas-ingly active in negotiating treaties or infor-mation exchange agreements that providefor the disclosure of information for use intax cases notwithstanding local bank secre-cy. See, e.g., Income Tax Treaty BetweenSwitzerland and the United States, Art.XXVI. If the bank at which the account isheld has a branch in the U.S., moreover, agrand jury subpoena can reach the records.See, e.g., Bank of Nova Scotia, 691 F.2d1384 (CA-11 , 1982), cert. den. (upholdingenforcement of subpoena), contempt sanc-tion upheld 740 F.2d 817 (CA-11 , 1984), cert.den. The government also can compelSmith to consent to the disclosure of thebank records. See Doe, 487 U.S. 201, 62AFTR2d 88-5784 (1988); Criminal TaxManual, supra note 5, § 41.06.

18 It also is not an option for a taxpayer to

avoid filing Schedule B, with its foreign bankaccount Question, by having no reportableinterest or dividends. The tax return instruc-tions make plain that a taxpayer must file aSchedule B even if there is no interest ordividend income but the taxpayer nonethe-

161

18 If the IRS had not yet contacted Smith, his

counsel may have more comfortablyadvised him to disclose the foreign bank

account on his 1998 return because hemight have b~en eligible for the Service's

voluntary disclosure policy. Under that poli-cy, the IRS usually does not recommendprosecution of a taxpayer who has filed false

returns in the past, or failed to file returns,and who comes forward, prior to the initia-

tion of an IRS inquiry and otherwise withoutprompting, to correct his tax affairs. The pol-icy applies only to taxpayers with legal

source income, and it requires making rea-sonable efforts to pay the outstanding liabili-

ty and continuing cooperation by the taxpay-er in any subsequent inquiry. The policy isnot legally binding on the IRS, and it does

not cover FBARs. See Internal RevenueManual section 9781, Special Agent's

Handbook section 342.142.17 See, e.g., Garner, 424 U.S. 648, 37 AFTR2d

76-1042-A (1976); Hornstein, 176 F.2d 217,38 AFTR 292 (CA-7, 1949); Dinnell, 428

F.Supp. 205, 40 AFTR2d 77-5764 (DC Ariz.,1977), aff'd without opn. 568 F.2d 779 (CA-

9,1978).

less would be required to answer "yes" tothe foreign bank account question.Moreover, Smith cannot avoid criminal expo-sure by giving a partial answer, i.e., answer-ing "yes" and simply not putting down thecountry, thereby avoiding the disclosure ofan account in a tax haven. Such an approachwould amount to intentionally withholdingrequired information and would be just asmuch an offense as no answer at all. It alsocould prompt further inquiry.

20 See Verkuilen, 690 F.2d 648, 50 AFTR2d 82-

5937 (CA-7, 1982); Neff, 615 F.2d 1235, 45AFTR2d 80-1217 (CA-9, 1980), cert. den.The privilege will not justify the failure to filea tax return, or any false, incomplete, or mis-leading statements on the return. See, e.g.,Sullivan, 274 U.S. 259, 6 AFTR 6753 (1927);Raborn, 575 F.2d 688, 41 AFTR2d 78-1077(CA-9, 1978); Milder, 459 F.2d 801, 29AFTR2d 72-1084 (CA-8, 1972), cert. den. Seegenerally limbie and Michel, "Strategies forFiling a Tax Return While Under a CriminalTax Investigation," 2 J. Asset Protection 34

(Sep/Oct 1996).21 See Garner, supra note 17; Jordan, 508 F.2d

750, 35 AFTR2d 75-524 (CA-7, 1975), cert.den.

gal problems, but his lawyer might besubject to potential investigation,criminal prosecution, incarceration,and disbarment.

Thus, Smith must answer the ques-tion, and his counsel must advise himon an answer that does the leastamount of damage without having himengage in additional criminal conduct.After exhausting all available exten-sions (perhaps Smith's audit will haveended by October), the only acceptablevehicle for such an approach is Smith'sFifth Amendment privilege againstself- incrimination.

Smith may decline to answer theforeign bank account question byclaiming his Fifth Amendment privi-lege. An individual taxpayer may assertthe privilege against self-incriminationto avoid making particular disclosureson the tax return.20 To be valid, a claimof privilege must be explicit on theface of the return and in response tospecific questions or line items whenthe requested information would pro-vide testimonial self-incrimination.21Thus, Smith's lawyer could advise himto place an asterisk next to the foreignbank account question, footnote hisanswer with an explicit claim of privi-lege, and then leave the "yes" and "no"boxes blank.

Obviously, Smith's assertion of hisFifth Amendment privilege in re-sponse to the foreign bank account

account, his self-interest in avoidingdisclosure of past violations, and his

lawyer's professional responsibility,create a delicate and troublesome setof tactical issues for Smith and his

lawyer.

The Form 1040If Smith makes a full disclosure on hisForm 1040, he will be providing theIRS with a clear lead to his Azure ac-count. The revenue agent conductingthe audit is likely to ask for a copy ofthe 1998 return, and the disclosure of abank account in a tax haven will surelyprompt further inquiry. There is noquestion that the government coulduse any disclosures made on the returnagainst Smith.17 With the extensivepowers of U.S. law enforcement au-thorities to obtain foreign evidence,even in tax haven jurisdictions, the de-tails of the account may well be discov-ered.18 To the extent consistent withher ethical responsibilities, Smith'slawyer ought not recommend a fulldisclosure on the return.

Yet, Smith's lawyer cannot advisehim to check "no" in response to theforeign bank account question, or toleave the answer blank.19 If she didthat, she might be entering into a con-spiracy with Smith to violate Section7206(1), and she might have aided andabetted his conduct by doing so. Notonly would this compound Smith's le-

years would constitute an admission ofSmith's prior false statements and cre-ate evidence that the IRS could useagainst him in the audit and, more im-portant, in a criminal investigation.16Smith and his lawyer can hope that therevenue agent will complete the auditwithout coming across informationthat would lead to discovery of theAzure account. If, however, the agentasks the right questions, Smith hasonly two lawful avenues open tohim-either he can respond truthfullyto the agent's inquiries, which wouldpresumably result in providing infor-mation about or leads to the foreignaccount, or he can assert his FifthAmendment rights and otherwise de-cline to cooperate with the audit. Ei-ther course may prompt the agent torefer the case to the Criminal Investi-gation Division.

Smith's lawyer faces an equallydaunting challenge in how to adviseSmith with respect to his current filingobligations. Smith must file a timely,truthful and complete 1998 tax return,and he is required to file a currentFBAR. His lawyer cannot ethically ad-vise him to disregard those legal oblig-ations. Nevertheless, providing thegovernment with the information re-quired by these fdrms could be crimi-nally incriminatiJ1g for Smith. The ten-sions among Smith's current filingrequirements relating to the foreign

JOURNAL OF TAXATION. SEPTEMBER 1999 .

would identify the items that are incompleteand explain that the taxpayer is currently

under investigation and cannot provide theinformation without damaging his adversari-al position.

A lawyer's good faith advice that a clientfile such a return probably could not be thebasis of a criminal prosecution, but sinceneither the courts nor the IRS have everapproved this strategy, it carries some riskthat the advice may be considered unethi-cal. (It also may not work-a broad dis-claimer may draw more scrutiny than a nar-

row assertion of the Fifth Amendment as toa specific item.) Moreover, while the strate-gy might be useful in finessing the reporting

.

The FBAR presents different, yetjust as problematic, issues for Smith'scounsel. It would be extremely risky tohave Smith fill out a truthful and com-plete form. Although the FBAR goes toa Treasury Department computingcenter in Detroit rather than the IRS,the disclosure of Smith's Azure accounton the form would give the govern-ment a clear road map to details aboutthe account, including the accountnumber and evidence of the accountbalance. These leads would permit aninvestigator or prosecutor to seekrecords relating to the Azure account,and the form itself could be used asevidence against Smith. Because Smithis a potential target of a criminal inves-tigation, his lawyer certainly shouldnot advise him to supply the informa-tion called for on the FBAR. Even ifa criminal investigation were notyet pending, there would be toogreat a risk that the FBAR would beuncovered.

Since Smith would be ill advised tofile a complete, accurate, and truthfulFBAR, his lawyer must consider otheroptions. She may consider that Smith'sFifth Amendment privilege can be in-voked to justify declining to file theform altogether, or that Smith can as-sert the privilege on the FBAR to pre-vent the government from obtainingevidence that can be used against him.

One could argue that Smith's FifthAmendment privilege should excusehim from the filing requirement be-cause the mere act of filing the FBARcould constitute testimonial self-in-crimination. Only those people withthe requisite authority or interest in aforeign bank account must file anFBAR. Thus, the mere act of filing con-

stitutes what the courts call a "testimo-

nial act"-that is, a nonverbal admis-

sion that the person who filed the form

is in fact required to do so because he

has a foreign financial account. The act

of filing the form, without regard to itscontents, would provide a lead to a pros-

ecutor or investigator about Smith's

connection with a foreign account. De-

pending on what other information

the government might have obtained,Smith's filing of an FBAR by itself

could well be an important "link in the

chain" of evidence necessary to charge

him with a crime.Yet, two courts of appeals have re-

jected the Fifth Amendment privilege

as a basis for the nonfiling of Bank Se-crecy Act forms. In Sturman, 951 F.2d

1466 (CA-6, 1991), cert. den., the gov-

ernment charged the principal defen-dant with, among other offenses, three

felony counts of failing to file the

FBAR as to otherwise undisclosed for-eign accounts. In Dichne, 612 F.2d 632

(CA-2, 1979), cert. den., the defendantfailed to file the BSA-required form re-

porting currency that he carried across

the U.S. border.24

Both defendants argued that the

applicable filing requirements violatedtheir Fifth Amendment privilege be-

cause the information provided on the

forms would incriminate them with

respect to other crimes. They assertedthat the BSA filing obligations were

unconstitutional, relying on Supreme

Court cases that struck down, on Fifth

Amendment grounds, selected report-ing obligations that compelled a tar-

geted group to acknowledge its partic-

ipation in a criminal offense. The mostprominent such case in the tax area is

Marchetti, 390 U.S. 39, 21 AFTR2d 539

question will be a "red flag" if the 1998tax return is audited or surfaces duringthe ongoing examination. But Smith'scounsel can offer no other ethical al-ternative to having her client admit tohis control over the Azure account,which would be more than just a "redflag"-it would constitute an admis-sion that could be used against Smithin a criminal prosecution. If the exam -

ining agent asks for the return, it is farbetter for Smith that it contains no in-formation that could prejudice him inthe event such an inquiry is (or has al-

ready) begun.Smith's right to assert his Fifth

Amendment privilege to avoid disclo-sure of his foreign bank account issubject to a potentially important lim-itation. Most courts considering the is-sue have held that while a taxpayer canassert the Fifth Amendment privilegein response to a line item, such as hisoccupation or the source of income,the taxpayer may not use the privilegeto withhold the amount of his taxableincome.22 Thus, while Smith may de-cline on Fifth Amendment grounds todisclose his authority over or interestin his Azure account, most courtswould hold that he must report theamount of income earned on the ac-count on his 1998 tax return. He canrely on his privilege against self-in-crimination as a basis for declining toidentify the source of that income.23

The FBAR

As discussed above, the Form 1040 is

not the only annual reporting require-ment relevant to Smith's Azure ac-count. He and his counsel still must

deal with his obligation to file Form

90-22.1.

22 Compare Goetz. 746 F.2d 705. 55 AFTR2d

85-390 (CA-11. 1984). Brown, 600 F.2d 248.43 AFTR2d 79-1004 (CA-10. 1979), cert.den., and Johnson, 577 F.2d 1304. 42AFTR2d 78-5624 (CA-5, 1978) (FifthAmendment privilege not available as toamount of income). with Verkuilen, supranote 20. and Barnes. 604 F.2d 121 (CA-2,1979), cert. den. (suggesting that privilegemay be asserted as to amount).

23 Another option open to a taxpayer under

scrutiny as to an issue that flows into a cur-rent filing year is to avoid both an incriminat-ing admission and an explicit assertion ofthe Fifth Amendment privilege by filing anadmittedly incomplete return. Such a return

162 JOURNAL OF TAXATION. SEPTEMBER 1999

of income earned on a foreign account, itdoes not solve the problem presented bythe foreign bank account question, whichstill must be answered. If the taxpayer

declines to check the foreign bank accountbox in the context of such a disclaimer, thatwould provide just as much of a lead as hisexplicit assertion of the Fifth Amendment

privilege.24 At that time, anyone transporting more than

$5,000 in currency into or out of the U.S.was required to file an appropriate form.This provision was amended in 1986 toincrease the amount to $10,000. P.l. No. 99-570, section 1358(c), codified at 31 U.S.C.section 5316(a)(1 ).

25 See also Grosso. 390 U.S. 62. 21 AFTR2d

554 (1968). the companion case to

Marchetti. 390 U.S. 39, 21 AFTR2d 539( 1968) .The Marchetti reporting require-ments violated the Fifth Amendment

because "the very filing itself necessarilyadmitted illegal gambling activity. " Selective

Service System v. Minnesota Public InterestResearch Group. 468 U.S. 841 (1984).

28 See. e.g., Mickens, 926 F.2d 1323 (CA-2.

1991). cert. den. (currency reporting require-ments upheld because information dis-closed on reporting form did not necessarilyreflect criminal activity); Kimball. 711 F.Supp.1031 (DC Nev.. 1989) (similar holding);Scanio. 705 F. Supp. 768 (DC N. Y., 1988)(similar holding); San Juan, 405 F. Supp. 686,

had a foreign account. Moreover, sucha "Fifth Amendment" FBAR could notbe used as evidence against Smith in asubsequent prosecution-a courtcould not properly allow the govern-ment to introduce the form againstSmith in a criminal case as evidence ofhis control over a foreign accountwhen he explicitly claimed his privi-lege against self-incrimination as tothat very fact.28

For Smith's lawyer, advising herclient to file a Fifth Amendment FBARin this manner is more sensible thanadvising him not to file the form onFifth Amendment grounds. While shemay find it tempting to relitigate theFifth Amendment issue, the disputewould arise in the context of a prose-cution ofher client in which she wouldlikely be a witness-on her client'sclaim of reliance on professional ad-vice-or a codefendant. Moreover, heradvice as to the FBAR is part of theoverall strategy of dealing with currentfiling issues; Smith still must file a taxreturn, and he cannot simply fail toanswer the foreign bank account ques-tion. He has no choice but to assert hisFifth Amendment privilege on his taxreturn as to his control over a foreignaccount and as to the source of the in-come earned on the account. The taxreturn will provide just as much of alead (and probably one more likely bediscovered) as the filing of a FifthAmendment FBAR. Because Smitheventually must file a tax return, hislawyer clearly would be taking an un-necessary risk for herself and herclient by instructing him to ignore thefiling requirement for the FBAR.29

There is no question that even aFifth Amendment FBAR discloses in-

closure on a federal tax return mightincriminate a taxpayer, it is permissi-ble for the taxpayer to decline to pro-vide the information and to assert theFifth Amendment privilege on the faceof the return. The FEAR should be nodifferent. Thus, while Smith is requiredto file an FEAR, he should not have toprovide details on the form that mightlead to the discovery of, or provide ev-idence of, other criminal offenses. Thisraises the question of how Smith couldvalidly assert his privilege against self-incrimination on the face of the FEAR.

The FEAR asks for specific infor-mation relating to the taxpayer and hisaccount, including name, address, so-cial security number, and the name ofhis bank, the bank account number,and an approximate balance in the ac-count. One approach would be forSmith to file a blank FEAR accompa-nied by a statement that identifies him,provides his social security number,and asserts his Fifth Amendment priv-ilege as to whether he is even requiredto file the form. Another approachwould be analogous to the one used onSmith's 1998 tax return, providing hisidentifying information but assertinghis privilege in response to particularquestions about his foreign accounts.

Either form clearly would complywith the filing requirement by identi-fying Smith and providing his socialsecurity number. An FEAR that assertsSmith's privilege as to the underlyingobligation to file provides the broadestpossible protection. Claiming the priv-ilege as to the obligation to file theFEAR would be no different than re-fusing on Fifth Amendment groundsto respond to an inquiry from an audi-tor or investigator as to whether Smith

37 AFTR2d 76-810 (DC Vt., 1975), rev'd onother grounds 545 F.2d 314 (CA-2, 1976)(sustaining conviction for failing to file BSA-required currency reports over FifthAmendment claim in part because of tradi-tional tolerance of broad government author-ity to regulate trans-border conduct).

t7 The Sixth Circuit found, in part, that the

FBAR does not carry a risk of self-incrimina-tion because it does not disclose the sourceof the funds in the account. Sturman, 951F.2d 1466 (CA-S. 1991). cert. den. Yet, evenif a taxpayer has legal source funds in a for-eign account, his mere filing of an FBARcould incriminate him if he has falselyanswered the foreign bank account questionon a tax return or failed to report incomefrom a foreign account.

163

(1968), in which the Supreme Courtinvalidated federal requirements thatgamblers disclose their unlawful wa-gering activity by posting a stamp attheir principal place of business, filingadditional forms, and reporting theirwagering income. At the time, gam-bling was unlawful in nearly everystate, and the Court found that "everyportion of the [reporting and pay-ment] requirements had the direct andunmistakable consequence of incrimi-nating" those required to comply withthem.25 As in Marchetti, the defen-dants in Sturman and Dichne arguedthat, merely by filing BSA forms, theywould be providing evidence thatmight incriminate them in variouscrimes.

Both the Sturman and Dichnecourts rejected the defendants' argu-ments because, in contrast to Marchet-ti, the conduct disclosed by filing therequired form was not itself illegal.The Sixth Circuit in Sturman recog-nized that the FBAR filing requirement"applies to all persons making foreigndeposits, most of whom do so withlegally obtained funds:' The court con-cluded that the required disclosuresdid not subject the defendants to a"real danger of self-incrimination:'and therefore held that the FBAR didnot meet the Marchetti test becausenot "every element" of the reportingrequirement would have incriminatedthe defendant. Similarly, in Dichne theSecond Circuit observed that there isnothing unlawful in transporting cur-rency in excess of the reporting re-quirement. Other courts have reachedsimilar results.26

While the analysis in Sturman andDichne is questionable in some re-spects,27 the courts have plainly decid-ed to tolerate some potential for self-in-crimination rather than sanction asystem where individuals may simplyignore the BSA filing requirements. Inlight of these authorities, Smith's lawyerwould be wise to find a mechanism totry to protect her client's interest otherthan simply failing to file the FBAR.

While the cases are clear that onewho fails to file an FBAR risks poten-tially serious penalties, they do notforeclose the option of claiming theFifth Amendment on the FBAR itself.As noted above, where a particular dis-

JOURNAL OF TAXATION. SEPTEMBER 1999 .

conclusion that he must do so. Under

existing precedent, however, no prose-

cutor or court could legitimately quar-

rel with a decision to file the FBAR

with the broadest possible assertion of

Smith's Fifth Amendment privilege.

CONCLUSION

Because of annual disclosure require-

ments, taxpayers engaged in ongoing

concealment of foreign accounts are

forced to "return to the scene of the

crime" every year. This provokes a

tricky set of issues for tax practitioners

advising these clients, especially those

already under IRS scrutiny. In such

cases, lawyers must reconcile their

professional responsibility to protect

the client's interest with their legal and

ethical obligations not to counsel, con-

done, or join in an unlawful cover up.

Although there are no ideal answers,

through the judicious and careful use

of the taxpayer's Fifth Amendment

privilege, the practitioner can recom-

mend a course of action that complies

with the tax and BSA reporting re-

quirements, while disclosing the least

amount of information that could

damage the client. .

28 While such a case would present an issue of

first impression, the courts generally prohibitthe government's use of a defendant's priorassertion of his Fifth Amendment privilegeas evidence of guilt. See Grunewald, 353U.S. 391, 51 AFTR 20 (1957); Monteleone,804 F.2d 1004 (CA-10, 1986), cert. den.;Vandetti, 623 F.2d 1144 (CA-6, 1980); Long,153 F. Supp. 528, 52 AFTR 222 (DC Pa.,1957), rev'd on other grounds 257 F.2d 340,1 AFTR2d 2011 (CA-3, 1958). If the defen-dant takes the stand. some courts haveallowed the government to impeach him byusing prior assertions of the privilege, buteven this is subject to constitutional limita-tions. See Grunewald. supra; Savory v. Lane.832 F.2d 1011 (CA-7, 1987).

29 Similar to the "admittedly incomplete

return" (see note 23, supra), Smith's lawyermight consider some communication withthe Treasury Department short of filing aFifth Amendment FBAR that might resolveher dilemma. Plainly, however, such a com-

munication could not identify Smith as herclient, because that would provide just asmuch of a testimonial admission as if Smithwere to file the form. Thus, such anapproach would necessarily entail describingher advice to an unspecified client not to filethe FBAR. Even if adopted in good faith,such a strategy carries serious risks forSmith's counsel, because she would beadmitting that she counseled a client to dis-regard a statutory filing requirement.

Moreover, the courts have rejected theFifth Amendment privilege in an analogouscontext as a basis for a lawyer's refusal toidentify a client on required forms. Sindel,53 F.3d 874, 75 AFTR2d 95-1894 (CA-9,1995); Blackman, 72 F.3d 1418, 77 AFTR2d96-313 (CA-9, 1995), cert. den. The govern-ment has imposed serious civil penalties inat least one case on a lawyer who failed todisclose client-identifying information on arequired form. Lefcourt, 125 F.3d 79, 80AFTR2d 97-6523 (CA-2, 1997), cert. den.

JOURNAL OF TAXATION. SEPTEMBER 1999164 .

formation to the government that itmay not otherwise have obtained. Itclearly provides an incriminating leadby acknowledging that Smith hasenough of a relationship with a foreignaccount that he felt compelled to filethe FBAR, even if the form itself can-not be used as evidence against him.Although the Fifth Amendment asser-tion on a tax return or the FBAR maydo nothing more than confirm the sus-picion of an IRS auditor or criminalinvestigator that Smith has an offshoreaccount, in certain cases that might besignificant. It may seem unfair to re-quire Smith to file the form in thiscontext, but the case law compels the