US Expat in Canada Loses Court of Appeals Challenge to Offshore Disclosure Penalties
In round two of a lengthy legal battle with the IRS, an expat living in Canada recently lost his appeal to the DC Circuit Court in which he challenged the IRS’s imposition of offshore disclosure penalties.
The case is interesting in several respects, demonstrating that the IRS is willing and capable of pursuing massive penalties simply for the non-filing of international forms, such as the FBAR (foreign bank account disclosure) and Form 5471 (foreign corporation disclosure), and illustrating that the IRS has the means at its disposal to join forces with other governments to ensure the collection of penalties.
The Dewees Case – Background
The factual background of Dewees v. U.S. (DC Dist Col April 9, 2019) begins with Mr. Donald Dewees’s entry into the IRS’s Offshore Voluntary Disclosure Program (“OVDP”) in 2009 to catch up on delinquent filings while living and working in Canada. Mr. Dewees is a U.S. citizen who has been living in Canada since 1971.
Mr. Dewees entered the OVDP expecting leniency in the form of limited penalties, but was instead hit with massive penalties to the tune of US$ 186,000 under the program. He then opted out of the program to see if he could achieve reduced penalties. The IRS came back with a new offshore penalty of $120,000 (plus interest), focusing on the late-filed Forms 5471 relating to Mr. Dewees’s Canadian company, which he had owned for the past 12 years without disclosing it to the IRS (the penalty was $10,000 for each year the form was not filed).
Mr. Dewees declined to pay the reassessed penalty for a long period of time, hoping that the IRS would not be able to ultimately collect while he continued to reside in Canada. This is where the US-Canada Treaty came into play. In accordance with Treaty, the Canadian Revenue Agency (CRA) withheld the U.S. tax penalty amount from a substantial Canadian tax refund due to Mr. Dewees.
Left with little choice at that point, Mr. Dewees paid the US$ 120,000 penalty to the IRS so his Canadian refund would be released. He then sued the IRS on several constitutional grounds and lost his case both in the lower District Court and in the higher Circuit Court of Appeals.
The Appeals Court Decision
The lawsuit claimed violations of the following:
The Eighth Amendment (prohibiting cruel and unusual punishment and excessive fines). The lower District Court dismissed this claim, reasoning that a payment to the IRS is only considered a “fine” if it is a “punishment for some offense.” A tax penalty, in contrast, has a “remedial” purpose and is therefore not subject to the excessive fines clause. Mr. Dewees did not appeal this issue to the Circuit Court.
Due process (guaranteeing the opportunity to be heard in the legal sense). The Circuit Court rejected this argument on the grounds that Mr. Dewees had the opportunity to challenge the IRS penalty twice – both through the Taxpayer Advocate’s Office and through the IRS Appeals Office – even before taking the IRS to court.
Equal protection (guaranteeing the equal application of federal laws among U.S. citizens). Mr. Dewees argued that the IRS has since created the Streamlined program, which should result in significantly less penalties, so it would be unfair to disallow him from participating in the program like others with late filings. The Appeals Court rejected this argument on the grounds that the Streamlined program was designed for taxpayers who had not yet come forward to the IRS. Mr. Dewees, in contrast, had already disclosed to the IRS, so it was reasonable for the IRS to determine that he was not a good candidate for the program.
Failing to File is a Serious Matter
As the Dewees v. U.S. decision demonstrates, not filing your U.S. taxes can quickly get out of hand if not dealt with properly. For delinquent taxpayers, programs are provided by the IRS to prevent potentially disastrous outcomes that could otherwise result from nondisclosure. However, depending on the facts and circumstances, a taxpayer may fail one or more of the program’s eligibility requirements and have to look at other potential solutions.
The team at Expat Tax Professionals has years of experience with U.S. tax fillings and helping delinquent taxpayers come into compliance with their reporting obligations. We can help you determine which program is best for your particular case.
By Joshua Ashman, CPA & Nathan Mintz,, Esq.