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11 July 2017

Why “Pleading the Fifth” Doesn’t Work in Tax Cases

Why “Pleading the Fifth” Doesn’t Work in Tax Cases

From corporate leadership to government officials, it seems invoking the Fifth Amendment and declining to provide information during legal proceedings has become popular. But if you assume the tactic can be used as a defense for not filing taxes, think again.

The recent case of Lee v. United States has brought this to light. When Theodore Lee’s 2006 income taxes were due, he was being audited by the IRS for his 1999-2005 taxes. Lee said he decided to defer filing his 2006 income tax return (until 2010), believing that doing so was protected by his Fifth Amendment right to not make self-incriminating statements.

“The court had an easy time with his argument, and rejected the claim. The Fifth Amendment does grant a privilege against self-incrimination. However, that doesn't mean you can just refuse to file taxes,” explains San Francisco-based tax attorney Robert W. Wood. “In fact, merely invoking the Fifth in a tax case can invite penalties or get the IRS looking more harshly at you.”

One area in which the IRS is likely to reject the assertion of Fifth amendment privilege is when offshore accounts are involved. That’s because, long ago, the court decided taxpayers can be forced to produce “essentially regulatory” records that are not purely personal. In short: You cannot claim Fifth Amendment protection for bank records, including Foreign Bank and Financial Accounts (FBARs).

There are very few exceptions to this rule but they do exist. In the 2015 case Youssefzadeh v. Comm’r, the income tax return was filed and  included all income, but certain line items showing where the money came from were blacked out. The taxpayer did at least two things right, according to the court: they filed the taxes on time and those taxes were “substantially correct.”  The court also found that a real and appreciable danger of self-incrimination existed when answering questions that might trigger a duty to file an FBAR. In this case, the Fifth Amendment privilege won but only after a long, hard legal battle.

Of course, the best course of action is to not get involved in any activity that could trigger a tax audit in the first place. Contact us to find out more.

Image Copyright: alexandrmoroz / 123RF Stock Photo

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