By Coleman Jackson, Attorney, Certified Public Accountant
September 01, 2017
The collection arm of the U.S. Internal Revenue Service is extremely long. This particular blog is limited to that reach as for collecting tax penalties associated with taxpayers who fail to file information returns pertaining to foreign bank accounts and foreign assets. The basic tax rule is that U.S. persons, which includes U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts with balances of $10,000 at any time during the calendar year must file annually Form 114, Foreign Bank and Financial Accounts (FBAR) with the Financial Crimes Network by April 15th of the following calendar year. Also, if specified individuals, which include U.S. citizens, resident aliens, and certain non-resident aliens that have an interest in specified foreign financial assets with balances of $50,000 on the last day of the tax year or $75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad) must file Form 8938, Statement of Specified Foreign Financial Assets with the Internal Revenue Service as a part of their annual federal tax return. In addition, any increments in wealth, such as, interest income, earnings and dividends from these foreign assets must be reported on the taxpayer’s annual federal tax return.
It is not relevant whether the U.S. persons live within the U.S. or overseas during the tax year. FBAR reports and tax compliance applies to U.S. persons who reside within the U.S. and those who resides outside the U.S. As we have discussed in previous blog(s), foreign tax treaties can affect the application of U.S. tax laws to foreign citizens or U.S. citizens residing in foreign countries. Foreign tax treaties can have a negative or positive impact on U.S. persons residing in foreign countries. The long-arm of IRS collections can reach U.S. persons residing in far off lands and IRS collections can use the power of foreign tax treaties to force U.S. persons to pay their U.S. tax bills. The remainder of this blog, explores an example … this example examines the plight of the U.S. citizens living and running a business in Canada. Keep in mind the application is not limited to U.S. citizens living in Canada. Foreign tax treaties could potentially apply with the same or similar impact to lawful permanent residents and U.S. citizens residing in Europe, South America, Africa, and Australia who have unpaid federal taxes, penalties and interest associated with delinquent FBAR reports, unreported income or unfiled tax returns. This blogs explores the reach of the long-arm of IRS collections overseas.
Consider Dewees. Dewees v U.S. was an FBAR penalty case decided on August 8, 2017 in the United States District Court for the District of Columbia. According to the Court, Donald Dewees is a U.S. citizen living in Canada, where he operates a consulting business. Dewees consulting business was incorporated overseas, therefore, 26 U.S.C. Sec. 6038(b) required him to file annual information about his business. For over ten years, Dewees failed to file the required the annual information reports. On advice of tax specialist, Dewees realized that he had not complied with filing requirements as it pertains to IRS Form 5471 and FINCEN Form 114. He entered into the IRS 2009, Voluntary Disclosure Program, but, later dropped out. The IRS then accessed a $120,000 FBAR penalty for delinquent FBAR; that is the IRS accessed $10,000 for each delinquent FBAR. Ultimately, Dewees filed several claims against the United States Government in U.S. District Court for the District of Columbia because the Canadian Revenue Agency notified him that it was holding his Canadian tax refund in abeyance due to his outstanding $120,000 debt to the IRS. The legal basis for holding the Canadian refund is found in Article XXXVI(A) of the United States-Canada Income Tax Convention. That is an international tax treaty between the United States of America and Canada. Dewees paid the Canadian Revenue Office the $120,000 penalty plus accrued interest. His attempt to recover the amount paid from the U.S. government in U.S. District Court failed. The Court ruled that Dewees failed to state a viable claim with respect to his excessive fines, equal protection and due process claims. He lost to the reach of the long-arm of IRS Collections overseas.
A better outcome could possibly been achieved by Dewees by staying in the OVDP program that has relaxed penalties for voluntary disclosures. Today the IRS Streamlined Domestic Offshore Procedures could be a viable option for eligible taxpayers with FBAR issues residing within the U.S. and outside the U.S. The Streamlined procedure has a 3 year look back period rather than the 8 year look back period of the OVDP and the penalty is less than the OVDP 27.5%. But there are other particulars that impacts whether a delinquent FBAR filer should disclose under the FBAR only, OVDP or one of the Streamlined Procedures. If the taxpayer willfully failed to file FBAR, OVDP is the only IRS program that currently removes the possibility of criminal prosecution- in most cases. It does not guarantee it; but OVDP certainly reduces the probability of referral for criminal prosecution. The Streamline Procedures do not remove the possibility of criminal prosecution, at all. It takes an analysis of all the facts and circumstances to properly advise the taxpayer in this area of law. The risk can be high, both in terms of civil fines and penalties and prison time upon conviction.
This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader. You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.
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