Legal Question of the Day: FBAR Penalties for USCs and LPRs Residing Outside the U.S. Is the IRS Website correct as a matter of law?

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The IRS website has a specific statement on their website titled Delinquent FBAR Submission Procedures

Importantly, the website provides the following comforting statement:FBAR 114 electronic

The IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

The question is the following: 

Is the IRS bound by their own statement on their website as a matter of law? 

In other words, can they go ahead and assess FBAR penalties notwithstanding the statement set forth above on their website?

USCs are necessarily subject to U.S. taxation on their worldwide income because they are defined as “United States persons” under title 26, Section 7701(a)(30)(A).  See,  The U.S. Civil War is the Origin of U.S. Citizenship Based Taxation on Worldwide Income for Civil War ImagePersons Living Outside the U.S. ***Does it still make sense?

Lawful permanent residents (“LPRs”) may, but are not necessarily defined as “United States persons” under title 26, Section 7701(a)(30)(A) by application of an applicable tax treaty and the flush language of Section 7701(b)(6).  See,  Timing Issues for Lawful Permanent Residents (“LPR”) Who Never “Formally Abandoned” Their Green Card and see the IRS practice unit discussion, Determining Tax Residency Status of Lawful Permanent … –

Now, this is all relevant to know and understand, in order to determine who exactly has a filing obligation under Title 31: regarding FBARs.  See, Why Most U.S. Citizens Residing Overseas Haven’t a Clue about the Labyrinth of U.S. Taxation and Bank and Financial Reporting of Worldwide Income and Assets


 Assuming you do have an FBAR filing requirement, e.g., residing in your country of residence with financial accounts in your FBAR sample list of civil penalty cases in USDC and COFC.PNGown country or in other financial institutions outside the U.S.; can the IRS assess a penalty against you for a delinquently filed FBAR?  What if you have properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs?

The answer may surprise you.  It will be addressed in a subsequent post.

Incidentally, to date, there have been more than 200 FBAR civil penalty cases filed in U.S. federal courts.  The Federal District Courts have seen approximately 200+ civil penalty cases and the Court of Federal Claims, much less popular venue, has seen 5 cases thus far.

Additional Time for Tax Return Filing – Extension until December 15th for USCs Residing Overseas: “Avoiding the Acceleration of the ‘Repatriation’ Tax”

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A prior post explained how a USC can avoid the acceleration of the 965 Repatriation tax for a USC residing outside the U.S., by timely filing an extension.  See, the following comment regarding the relief granted by the IRS –1040 irs form 1040 yr 2017

  • a timely election under Section 965(h)(1) needs to have been made, which is typically extends the return due date until October 15, 2018 (USCs residing outside the U.S., the extension due date was June 15th, 2018 and requires the filing of a specific automatic extension form (IRS Form 4868) by that date); and . . . 


See, Is it too late to comply with the “965 Hammer” (aka the “Transition” or “Repatriation” Tax) for USCs Residing Overseas?

Also, the IRS provides in its Questions and Answers to Reporting Related to Section 965 – Q16 in relevant part as follows:

 Q16: If an individual fails to timely pay his or her first installment of tax due under section 965(h), will the IRS assess an addition to tax for failure to pay?  Will the taxpayer’s requirement to pay all subsequent installments be accelerated under section 965(h)(3)?

. . . the IRS has determined that, if an individual’s net tax liability under section 965 4868 Automatic Extensionin the individual’s 2017 taxable year is less than $1 million, the individual makes a timely election under section 965(h), and the individual did not pay the full amount of the first installment by the due date under section 965(h)(2), the failure to make the payment will not result in an acceleration event under section 965(h)(3) so long as the individual pays the full amount of the first installment (and its second installment) by the due date for its 2018 return (determined without regard to extensions).  

The only way to make a timely election, is to do so prior to the due date of the tax return.  For USCs residing outside the U.S. (who already properly filed an extension by June 15th, 2018 with IRS Form 4868, the due date of the election and return filing is days away –  due October 15, 2018.

There is a way to further extend the due date from October 15th for USCs residing overseas until December 15th.  FAQ IRS re Individual International Taxpayers

Treas. Reg. Section 1.6081-1(b)(1) allows USCs residing overseas to request an additional extension until December 15th, provided

. . . A taxpayer desiring an extension of the time for filing a return, statement, or other document shall submit an application for extension on or before the due date of such return . . . ; however, taxpayers may apply for an extension in a letter that includes the information required by this paragraph. . . .  the taxpayer should make the application for extension to the Internal Revenue Service office where such return . . . is required to be filed . . . the application must be in writing, signed by the taxpayer or his duly authorized agent, and must clearly set forth—

1.6081-1(b)(1)(i) – The particular tax return, information return, statement, or other document, including the taxable year or period thereof, for which the taxpayer requests an extension; and

1.6081-1(b)(1)(ii) –  An explanation of the reasons for requesting the extension to aid the internal revenue officer in determining whether to grant the request.

A sample letter requesting an additional extension might look like this – with the foreign address of the USC reflected on the top of the letter:


Taxpayer 1 (USC) & Taxpayer 2 (USC)

No. 807 Address Foreign Street

Foreign City, Foreign Country, Codigo 87903-187


October 3, 2018
Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0215


Re:  Additional Extension of Time to File IRS Form 1040:  Taxpayer 1 (USC – SSN ***-**-7497) & Taxpayer 2 (USC SSN ***-**-4916)

Dear Sir or Madam:

We previously filed Form 4868 to extend our 2017 personal tax return. We live overseas outside of the good old US of A.  Pursuant to Treas. Reg. §1.6081-1 (b), we are requesting an additional 2 months extension so that we can accurately file complete and accurate returns.

We are shareholders of certain foreign companies (in our country of residence,  and the records are kept in Foreign Country and are in foreign currency and in Foreign Language.  Additional time is required for the complex international information recording requirements on our tax returns, including IRS Forms 8865 and 8938 (which we know you would like to assess us penalties of US$10,000 for each form that you might argue are substantially incomplete in their presentation).

Please confirm this is approved. All taxes due were paid when we requested the extension in June, 2018.

Kind regards,

_________________________Signature Taxpayer 1 (USC) 

__________________________Signature Taxpayer 2 (USC)

For some additional guidance in layman’s terms, you might want to look at the IRS website that is somewhat helpful and titled: Frequently Asked Questions (FAQs) About International Individual Tax Matters

14th Annual University of San Diego School of Law – Procopio International Tax Institute (Oct. 31, Nov 1 & 2)

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The international tax conference will be held October 31 through November 2 on campus.

Topics will address * the U.S. federal international tax reform, * cross border tax implications of the new “NAFTA II”-USMCA Agreement, * passport revocations, * FBAR penalty strategies in light of Colliot, Wadhan and Norman, *FDII, *GILTI, * lessons from cross border tax policy government leaders, among many other international tax topics. USD PITI screen capture of 2018 conference



Thursday, November 1, 2018 — Friday, November 2, 2018 from 8:00 a.m. to 5:00 p.m.


Joan B. Kroc Institute for Peace and Justice, Alcalá Park, San Diego, California


A particularly interesting panel for readers of Tax-Expatriation, Matters of U.S. Citizenship Renunciation – Relinquishment & LPR Abandonment is

The IRS Director of Collection Policy, Ms. Kristen Bailey will be discussing passport revocation issues on the panel –  U.S. Passport Revocations for “Seriously Delinquent Taxpayers” – IRC §7345 & Role of the DOJ, IRS, U.S. District Court and U.S. Tax Court

Taxpayer’s Advocate (TAS) and Passport Revocations – Unconstitutional Restriction on Right to Travel Internationally?

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As the State Department starts rolling out more letters denying U.S. passport renewals and initial applications on the backs of IRS Notices CP 508C to U.S. citizens (USCs); USC taxpayers are highly motivated to Revocation of Passport Notice IRS 7345address their “seriously delinquent tax debts.”  What rights do USCs have vis-a-vis these government allegations in their tax certifications?

See,  Part II: Example of United States Department of State – Letter Denying Passport Renewal – The Time has Really Come: Revocation or Denial of U.S. Passports as IRS Begins Issuing Notices to U.S. citizens


For a deep dive into a range of issues that USCs need to consider, if they find themselves on the side of an unfortunate IRS Notices CP 508C – see the TAS’s excellent Interim Guidance Memorandum dated April 26, 2018.  One key point made by the TAS memo is:US Passport

The right to travel internationally is a fundamental right, protected by the Due Process Clause of the Constitution. Under the Universal Declaration of Human Rights, adopted in 1948 by the United Nations after a unanimous vote (including the United States) “[e]veryone has the right to leave any country, including his own, and to return to his country.” The National Taxpayer Advocate expressed concerns that the IRS’s implementation of the passport program fails to protect taxpayers’ right to travel as well as their rights promised under the Taxpayer Bill of Rights. See the National Taxpayer Advocate’s blog and the Fiscal Year 2018 Objectives Report to Congress.

The U.S. Supreme Court, in an opinion penned by retired Justice Souter in Sosa v. Alvarez-Machain (2004), has some interesting observations about the Universal Declaration of Human Rights (which is cited above by the Taxpayer Advocate) limiting its application in the Alvarez-Machain case.  This is a fascinating case to read, as it arises out of the tragic torture and murder of a DEA agent, Enrique Camarena-Salazar in 1985 in Mexico.  Physician Alvarez-Machain was subsequently indicted in the U.S. as part of the torture and murder scheme and the DEA hired private Mexican nationals to seize Passport Inside Back Page - USC Taxation ReferenceAlvarez and bring him to the United States in a private plane to stand trial.

Alvarez-Machain was ultimately granted motion for a judgement of acquittal on the criminal charges.

In response, Alvarez-Machain then sued the federal government under the Federal Tort Claims Act and the Alien Tort Statute.

The Supreme Court opined (on these tort action claims and the application of international law as to U.S. federal tort statutes) as follows:

. . . To begin with, Alvarez cites two well-known international agreements that, despite their moral authority, have little utility under the standard set out in this opinion. He says that his abduction by Sosa was an “arbitrary arrest” within the meaning of the Universal Declaration of Human Rights (Declaration), G. A. Res. 217A (III), U. N. Doc. A/810 (1948). And he traces the rule against arbitrary arrest not only to the Declaration, but also to article nine of the International Covenant on Civil and Political Rights (Covenant), Dec. 19, 1996, 999 U. N. T. S. 171,22 to which the United States is a party, and to various other conventions to which it is not. But the Declaration does not of its own force impose obligations as a matter of international law. See Humphrey, The UN Charter and the Universal Declaration of Human Rights, in The International Protection of Human Rights 39, 50 (E. Luard ed. 1967) (quoting Eleanor Roosevelt calling the Declaration “ ‘a statement of principles … setting up a common standard of achievement for all peoples and all nations’ ” and “ ‘not a treaty or international agreement … impos[ing] legal obligations’ ”).23 And, although the Covenant does bind the United States as a matter of international law, the United States ratified the Covenant on the express understanding that it was not self-executing and so did not itself create obligations enforceable in the federal courts. . .  [emphasis added]

Section 7345(e) provides for judicial review of the IRS’s certifications of “seriously delinquent tax debts” as follows:

(e)Judicial review of certification

(1)In general

After the Commissioner notifies an individual under subsection (d), the taxpayer may bring a civil action against the United States in a district court of the United States or the Tax Court to determine whether the certification was erroneous or whether the Commissioner has failed to reverse the certification.



If the court determines that such certification was erroneous, then the court may order the Secretary to notify the Secretary of State that such certification was erroneous.


Surely, the U.S. Tax Court and Federal District Courts will have much more to say about the rights of USCs who have their U.S. passports revoked or renewals denied by application of 26 U.S.C. 7345.  Will the Universal Declaration of Human Rights be meaningful to the Courts applying Section 7345?

How many errors will the IRS make in issuing certifications of “seriously delinquent tax debts”  to USCs around the world?

22.  Article nine provides that “[n]o one shall be subjected to arbitrary arrest or detention,” that “[n]o one shall be deprived of his liberty except on such grounds and in accordance with such procedure as are established by law,” and that “[a]nyone who has been the victim of unlawful arrest or detention shall have an enforceable right to compensation.” 999 U. N. T. S., at 175—176.
23.  It has nevertheless had substantial indirect effect on international law. See Brownlie, supra, at 535 (calling the Declaration a “good example of an informal prescription given legal significance by the actions of authoritative decision-makers”).

Part II: Example of United States Department of State – Letter Denying Passport Renewal – The Time has Really Come: Revocation or Denial of U.S. Passports as IRS Begins Issuing Notices to U.S. citizens

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Earlier posts have addressed Section 7345 of Title 26 and how the U.S. Department of State (DOS) will deny the renewal of passports.

See, The Time has Come: Revocation or Denial of U.S. Passports as IRS Begins Issuing Notices to U.S. citizens and Revocation or Denial of U.S. Passport: More on new section 7345 (Title 26/IRC) and USCs with “Seriously Delinquent Tax Debt” Sample letter from Department of State re Revocation of Passports - Seriosly Delinquent Tax Debt.PNG

The IRS has purportedly issued tens of thousands of IRS Notices CP 508C to U.S. citizen (USC) taxpayers during the first part of this year, 2018.

We have now started seeing examples of the letters issued by the DOS.  They are harsh and direct.

See here such a letter, with identifying information redacted.

The letter from the DOS says it is obliged to comply with the letter from the Department of Treasury’s Internal Revenue Service (IRS) certifying the USC has a “seriously delinquent tax debt.”  The letter goes on to say that it has no actual information concerning the “seriously delinquent tax debt” and it is the IRS who must be contacted.

The DOS essentially “washes its hands” of this legal issue, by simply saying the USC taxpayer must resolve the issue within ninety days directly with the IRS.

Only after “”these arrangements” have been made with the IRS, can the USC taxpayer contact the National Passport Information Center according to the letter.

There are a host of legal issues and practical problems that USC taxpayers face in these circumstances.  Many of these will be covered in later posts.

. . . more to come . . .





Is it too late to comply with the “965 Hammer” (aka the “Transition” or “Repatriation” Tax) for USCs Residing Overseas?

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For more background on how Section 965 works, please see,  The “965 Hammer” (aka the “Transition” or “Repatriation” Tax) for USCs Residing Overseas, which explains how U.S. citizens (USC) residing overseas may owe U.S. federal income tax on “phantom income”.  IRS 965 Transition StatementI call it phantom income as it does not need to be received (nor does the USC) need to have any right to it for it to be taxed.

The tax is calculated with reference to (1) the type of assets held in the USC’s foreign corporation (cash or not), and (2) the previously un-taxed earnings of the foreign corporation owned by the USC.

The IRS has a dedicated page on their website to the Section 965 Transition Tax  that provides a basic overview.  The rules are complex and the IRS addressed a set of Q&As to help taxpayers understand how they must report on their tax return; see, Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns

Normally, USCs combined with other “U.S. persons” need to have greater than 50% of the shares of the foreign corporation to be subject to the 965 Hammer/Repatriation tax.  965 Ownership % Example Procopio Newsletter Eg 3The following example shows how U.S. individuals combined to own 51% cause the foreign corporation to be a “controlled foreign corporation” (CFC) and therefore a “specified foreign corporation” (SFC) that causes the USCs to be subject to the tax on “phantom income” to the extent the company has previously un-taxed earnings.

In contrast, a USC that owns 10% (or 21% or 30%) should not be subject to this tax, as long as the foreign corporation is not a CFC and/or there is no U.S. corporate shareholder that owns 10% or more of the foreign corporation.  The following example (Example 2) shows how a USC that owns 15% and another USC who owns 20% of a foreign corporation, will not be subject to the 965 Hammer, since it is neither a CFC or a SFC.  965 Ownership % Example Procopio Newsletter

Compare that scenario to the following example (Example 1) that shows the somewhat “capricious” nature of how a USC that only owns 10% in a different fact pattern of ownership, can still be subject to the 965 Hammer repatriation tax.  This is true, even when other U.S. owners have a mere 11% ownership (but in this case it is a U.S. corporate owner with >=10%),  causing it to be a SFC and therefore triggering the 965 Hammer/repatriation tax: 965 Ownership % Example Procopio Newsletter Eg 1

In this last example, the USC owns only 10% of the shares of the foreign corporation, but since a U.S. corporate shareholder owns at least 10% of the shares of the same foreign corporation, all U.S. shareholders are subject to the 965 Hammer/repatriation tax.

There are some silver linings to this tax.

First, the tax rate applicable (8% in the case of non-cash assets) can be much lower than the normal statutory rate on dividend distributions.

Second, since the tax is mandatory (hopefully at a lower rate as cash and cash equivalents carry out a 15.5% higher tax rate), it can provide an opportunity to restructure and/or repatriate profits of the foreign corporation.  This can give liquidity in the hands of the USC shareholder who was otherwise deterred from making actual dividend distributions or investing in U.S. property (which is in itself normally deemed a dividend to the USC shareholder) for foreign corporations that are “CFCs.”

Maybe USCs residing overseas will want to restructure their business operations to obtain specific tax advantages from the federal tax reform (e.g., 21% or 13.25% corporate tax rates that can be applicable for U.S. corporate taxpayers)?

Third, the statute allows the taxpayer to make a timely election (under Section 965(h)(1)) to defer the payment of the tax over many an eight (8) year period as follows:965 installment schedule

There are no circumstances where a USC would not want to defer the payment of the tax over time?  Why pay for something today, when you can pay it tomorrow without an interest carrying charge?

For instance, if the total 965 Hammer/repatriation tax is US$200,000 for a USC, why would she not want to pay only 8% or US$16,000 in 2017/2018 and defer the rest of the US$200,000 tax payments over time?

The payments are “back-loaded” in later years and do not carry an interest charge.

Also, the IRS granted further relief for individuals who owe less than US$1M of 965 Hammer/repatriation tax.  This relief allows the payment/deferral of the first installment otherwise due in 2017 until 2018 (and will not trigger the full amount immediately due), provided all of the following are satisfied:

  • a timely election under Section 965(h)(1) needs to have been made, which is typically extends the return due date until October 15, 2018 (USCs residing outside the U.S., the extension due date was June 15th, 2018 and requires the filing of a specific automatic extension form (IRS Form 4868) by that date); and
  • pays the first installment by the due date of of the 2017 tax return, without regard to extensions (which will typically be June 15th, 2018 provided the USC is residing overseas).

Bottom line:  a USC who has timely filed an extension to file their IRS Form 1040 individual income tax return by June 15th, still has time to timely file the election under Section 965(h)(1) to defer the payment of the 965 Hammer/repatriation tax.

Incidentally, the Treasury published proposed regulations at the beginning of last month on Section 965 –  Treasury Announces Guidance on One-Time Repatriation Tax on Foreign Earnings





The “965 Hammer” (aka the “Transition” or “Repatriation” Tax) for USCs Residing Overseas

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Small businesses around the world commonly operate through companies established in their country of operation.  According to the U.S. Tax Foundation, with admittedly outdated information from the year 2014, there were 1.7 million traditional C corporations, compared to 7.4 million partnerships and S corporations; even more sole proprietorships operating in the U.S.

I could not find similar data for other countries around the world, which is where Section 965 takes us.

USCs who live outside the U.S. and operate a business through a corporate entity in their country of residence (e.g., Canada, Mexico, UK, France, South Africa, Japan, Brazil, Hong Kong, Sweden, etc.) can be shocked when they learn how the new tax provision of IRC Section 965 works. IRS Data Corporate Income Tax Returns 2013

People read about the Administration and Congress’s goal to tax mega-technology companies such as Google, FaceBook, Microsoft and the like on their accumulated overseas profits in low tax jurisdictions.  See, for instance, U.S. companies will pay billions in tax on offshore cash piles from CNN Money (by Alanna Petroff)   and Apple Leads These Companies With Massive Overseas Cash Repatriation Tax Bills from FORTUNE (by Lisa Marie Segarra, January 18, 2018).

Hence, new IRC Section 965 imposes a one-time mandatory repatriation tax on accumulated earnings and profits of foreign corporations.  The tax is paid by the U.S. shareholder.  This makes policy sense, if the goal is to tax U.S. based taxpayers, especially mega companies with billions or 100s of millions of dollars of offshore un-taxed cash.  In the past, much of these offshore profits could avoid U.S. taxation indefinitely as long as they were not actually repatriated in the form of dividends to the U.S. shareholder(s).

However, most people at the time were not expecting that this same repatriation tax would befall USCs living overseas arising from their local business operations. 1040 irs form 1040 yr 2017

Probably Congress and the Administration did not contemplate the fallout to these USC taxpayers.  They were focusing on a different group of taxpayer.  Nevertheless, Section 965 imposes immediate U.S. individual taxation on the “phantom income” (i.e., when no dividends are distributed to the USC shareholder) of the USC shareholder.

The next few posts will be dedicated to trying to explain in plain English how the “965 Hammer” (as I am affectionately calling it) applies to USCs residing in their home country with a business or investment assets held in a corporation.

The due date under the statute for paying this 965 tax has “come and past”; however, the IRS has granted certain extensions of time.  These will be discussed in subsequent posts.

Importantly, a timely election under Section 965(h)(1) must be made by the due date (including extensions) for filing the return for the relevant year.  For USCs residing outside the U.S., that due date was June 15th, 2018 and hopefully all USCs filed an automatic extension (IRS Form 4868) by that date, which would extend your due date to October 15, 2018 and the time to file the 965(h)(1) election. 4868 IRS Form 4868 automatic extension

Q&A 16 of the IRS website (Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns) addresses key provisions here –


Posted: 06/04/2018

Q16: If an individual fails to timely pay his or her first installment of tax due under section 965(h), will the IRS assess an addition to tax for failure to pay?  Will the taxpayer’s requirement to pay all subsequent installments be accelerated under section 965(h)(3)?

. . . However, the IRS has determined that, if an individual’s net tax liability under section 965 in the individual’s 2017 taxable year is less than $1 million, the individual makes a timely election under section 965(h), and the individual did not pay the full amount of the first installment by the due date under section 965(h)(2), the failure to make the payment will not result in an acceleration event under section 965(h)(3) so long as the individual pays the full amount of the first installment (and its second installment) by the due date for its 2018 return (determined without regard to extensions). . . 


A USC’s extensions and elections are very important here.  A later post will explain how a USC residing outside the U.S. can obtain an additional extension at the discretion of the IRS.  This can extend the due date of the 2017 income tax returns (IRS Form 1040) from the extended October 15th date to a further extended date of December 15th, 2018; for which the 965 election must be correctly made by the USC individual shareholder of a non-U.S. corporation.

Why have U.S. Citizenship Renunciation Numbers Plateaued?

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The number of U.S. citizens who have renounced has plateaued starting in 2016.  That was the peak year with 5,409 renunciations followed by a similar number of 5,132 inUSC Renouncing through 2017 Graph 2017.    See an older 2014 post that highlighted the then record of 2,999 for the entire year.

The 2014 Third Quarter Renunciations Is probably the New Norm –


The data used for these running compilations, with the individuals names published can be reviewed on the federal government’s website.  The complete set of lists going back to the mid-1990s can be reviewed here.  Quarterly Publications.   Quarterly Publication of Individuals, Who Have Chosen to Expatriate

The total number of renunciations for the first two quarters of 2018 was 2,185.

None of this answers why these numbers have stopped increasing in a ski slope fashion?


A “Resident” is a “Resident” is a “Resident” – or Not?

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Who is a “resident”?  What is a “resident”?  This sounds like such a basic question. It is not so simple for tax purposes; nor for other provisions of the law.application for US passport p1

There is the colloquial meaning of resident.  For instance, if Mr. Smith says, “I have been a resident of Montana on my ranch for 30 years”; to what does he refer?  What if Mr. Smith has a house in California (which he has owned for 15 years) and another ranch in Alberta, Canada that he has owned for 45 years.  Is he also a “resident” of Canada and California?

What if he is not a U.S. citizen but holds a particular type of visa, such as lawful permanent residency (an immigrant visa)?  What if he has a non-immigrant visa, such as an E-2 visa?  What if he only spends 4 months a year on his ranch in Montana, of where is he a “resident”?

Is he a “resident” in some or all of these scenarios?   Why is this important in the context of “U.S. expatriation taxation”?FBAR 114 electronic

There are three sources of federal law where it becomes very important, which will be discussed in later posts:

In addition, various states, such as California, Texas and Washington D.C. (actually not a state; but all places I happen to be licensed to practice law) have their own definitions of who are “residents” for income tax and other purposes.  US map

Subsequent posts will discuss the importance of understanding who is a “resident” and the implications under these various laws.

Laymen regularly have an idea of where they are “resident” – but that idea is often very different from definitions of “resident” under federal Titles 31, 26 and 8 and state laws (e.g., Texas, D.C., Florida, California, New York, etc.).


Mr. Dewees gets Smacked! U.S. District Court Upholds Multiple $10,000 Penalties (US$120,000 – NO Forms 5471) for USC Residing in Canada

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United States Citizens (“USCs”) and lawful permanent residents (“LPRs”) residing overseas should read the story of Mr. Dewees to learn what could happen if they go into the offshore voluntary disclosure program (“OVDP”); when he appears to have been a “good faith” taxpayer.  The IRS issued a press release in March 2018 – IRS to end offshore voluntary disclosure program; Taxpayers with undisclosed foreign assets urged to come forward now  The IRS explained that it will close the program next montNorth America Maph on September 28, 2018.  Take the story of the Dewees into consideration before rushing into the OVDP.

This is not a new case, as the U.S. District Court for the District of Columbia issued its opinion a year ago – Dewees v. United States, 2017 U.S. Dist. LEXIS 124989 (D.C. D.C. 2017).  However, it is an important case if anyone is confused about whether they should go into the OVDP.  See the story of the Dewees.

Mr. Dewees resided in Canada and did file U.S. income tax returns, but not all information returns. See a related previous post –  Why Most U.S. Citizens Residing Overseas Haven’t a Clue about the Labyrinth of U.S. Taxation and Bank and Financial Reporting of Worldwide Income and Assets

He also did not initially pay information reporting penalties assessed by the IRS regarding his Canadian company.   He resided in Canada where is business and company was located.  The Court noted that he “. . . voluntarily disclosed [to the IRS] his failure to file the required informational returns . . . ”  The Dewees were “rewarded” by their good faith efforts by the IRS which then turned around and ” . . .  assessed a statutory penalty of $120,000, $10,000 for each year of non-compliance . . . “

The Canadian revenue authority would not refund his Canadian tax refund until the IRS penalty was paid in full.  He eventually paid $120,000 of information penalties and brought a suit for refund in U.S. District Court.

The U.S. District Court first explained the obligations of USCs residing overseas with –

(i) controlling interests in foreign corporations (i.e., filing obligations under IRC IRS Form 5471 - page 1Section 6038 to file IRS Form 5471) – see an earlier related post Many Canadians have expressed frustration with U.S. tax policy of worldwide taxation of U.S. citizens., and

(ii) interests in foreign financial accounts (i.e., filing obligations of foreign bank account reports under Title 31) see a previous post, Nuances of FBAR – Foreign Bank Account Report Filings – for USCs and LPRs living outside the U.S.

The Court then dismissed the suit for refund on the grounds that Mr. Dewees failed to state a viable claim and the Court therefore lacked jurisdiction to hear his claims (which were “excessive fines”, “equal protection” and “due process” claims).

Here, the USC residing in Canada was apparently well intended, since the District Court said that Mr. “Dewees learned that he had failed to comply with these requirements . . . ” In another part of the opinion, the Court uses the word “neglected” to file information returns for over a decade.

Learned” and “neglected” certainly does not sound intentional, which is probably why the IRS did not attempt to pursue Title 31 willfulness FBAR penalties.

The USC entered the OVDP on the advice of a tax specialist and then withdrew after the IRS was proposing to assess an “OVDP in-lieu of penalty” of US$185,862.  Chart - OVDI Article Martin Ferreira

The IRS ultimately did not pursue any FBAR penalties in this case, not even the annual $10,000 per year penalty for failure to file the FBAR form.

Had Mr. Dewees lived in any other country (other than Canada) he probably would not have had the local taxman (i.e., the Canada Revenue Agency) step in to indirectly help the IRS collect the penalty amounts assessed.  See an earlier post,  U.S. Enforcement/Collection of Taxes Overseas against USCs and LPRs – Legal Limitations

The U.S.-Canada income tax treaty has a special “assistance in collection” provision, which provides in part as follows –

Article XXVI A
Assistance in Collection
1. The Contracting States  [referring to the U.S. and Canada] undertake to lend assistance to each other in the collection of taxes
referred to in paragraph 9, together with interest, costs, additions to such taxes and civil penalties, referred to in this Article as a “revenue claim”. 

I explained in an earlier post, how the “Revenue Rule” was a common law concept that generally prohibited the U.S. government from assisting in the collection of taxes of Passport Inside Back Page - USC Taxation Referenceanother country.  Hence, the U.S. Treasury renegotiated the treaties with five countries (including Canada) that now have a specific treaty provision such as XXVI A above:

As a result of these cases and the Revenue Rule, the U.S. and Canada modified their income tax treaty to (at least in theory) allow for the international enforcement of taxes.  The U.S. now has five income treaties with “mutual assistance” provisions: Canada, Sweden, France, Denmark, and the Netherlands (with a clause in the newly negotiated, but yet to go into force, Swiss treaty).

In the Dewees case, we learned that the assistance in collection provision is not merely a theoretical tool that can be used in collecting taxes.  The actions of both the Canadian (CRA) and U.S. governments (IRS and District Court Judge), made the provision effective.   The US$120,000 penalty, that has nothing to do with any U.S. taxes, was collected by the IRS.

Questions to ponder in this case:

  1. Would the USC have been better off, by getting proper advice as to how to file on a going forward basis?
  2. Why did the USC ever go into the OVDP program in the first place under these facts?
  3. Did the USC know about the “streamlined” filing procedures of the IRS for U.S. Taxpayers Residing Outside the United States?
    • In this case, the program did not exist at the time the taxpayers went into the OVDP in 2009.
  4. Why did Dewees not simply consider (assuming he had good faith facts) filing amended tax returns to include late filed IRS Form 5471 forms?
  5. Why did the IRS aggressively pursue these $120,000 in information penalties (presumably because he opted out of the OVDP program and they like to make examples out of those taxpayers that leave the program)?
  6. Would and will the IRS assess more $10,000 per year penalties for additional companies for a good faith failure to file IRS Form 5471 forms?  In other words, what if the Dewees had four Canadian companies, would the IRS have assessed US$480,000 (US$10,000 per year X 4 – per company – X 12 – the number of years the form was not filed)?
  7. Will the IRS have success with any other country that does not have a similar tax treaty provision on the collection of taxes as the unique U.S.-Canada provision?
    • What about Sweden, France, Denmark, and the Netherlands with specific provisions in the U.S. income tax treaties?  See a discussion of the U.S. District Court case in Georgia involving a Danish citizen, Torben Dileng v. Commissioner as discussed by Keith Fogg in the Procedurally Taxing Blog
  8. Will the aggressive actions of the IRS in this Dewee case to collect penalties backfire?  Will USCs residing overseas be less likely to go into specific IRS programs for fear of being smacked down to the tune of US$120,000 (plus legal fees and costs) for merely neglecting to file information returns when no U.S. taxes are even owing?