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IRS pursues Canadian resident who refused to pay offshore penalty

Thursday, 10 August, 2017

A US citizen living in Canada has been forced to pay a USD120,000 penalty assessment imposed on him when he joined the US Internal Revenue Service's offshore voluntary disclosure initiative.

Donald Dewees, a resident of Toronto, had omitted to file Form 5471s (Information Return of US Persons with Respect to Certain Foreign Corporations) for his consulting business for twelve years. When he discovered his omission in 2009, he applied to join the offshore voluntary disclosure initiative (OVDI), and was accepted. He expected this to offer him limited penalties for his non-compliance, in return for his filing of income tax returns and FBARs (foreign bank account reports) for six years, along with paying income tax owed, plus a 20 per cent inaccuracy penalty, plus interest on both. He would also need to pay a miscellaneous offshore penalty in lieu of all other penalties.

Dewees was shocked when the IRS then assessed him under OVDP for a quarter of a million US dollars’ worth of penalties and tax, although a few weeks later the IRS admitted it had double-counted some of the accounts, and commuted the charge to USD186,000.

Dewees refused to pay even the reduced assessment. Ultimately, in June 2011, he told the IRS he was withdrawing from the OVDP because of the excessive amount of penalties. The IRS duly withdrew the OVDP penalties, but immediately substituted a new penalty of USD120,000.

Dewees again declined to pay, presumably because he thought his Canadian residence put him beyond the IRS' grasp. It did not. In May 2015, the Canada Revenue Agency (CRA) owed him a substantial tax refund on his Canadian taxes. Using the US-Canada tax treaty, the IRS enlisted the CRA to withhold this refund from Dewees.

At that point, Dewees paid the IRS the USD120,000 penalty, and immediately launched a suit against the IRS to have his payment refunded on constitutional grounds. These were:

  • the Eighth Amendment (the ban on cruel and unusual punishment and excessive fines);
  • due process (the opportunity to be heard at a meaningful time and in a meaningful manner); and
  • equal protection (the contention that he was not allowed to participate in a later and more lenient disclosure programme, the Streamlined Filing Compliance Procedures, whereas other similarly situated taxpayers were, thus denying him the opportunity to have a lower penalty imposed).

The US DC District Court dismissed all his objections and upheld the USD120,000 penalty (Dewees v United States, Case No. 16-cv-01579 CRC).

Sources

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