United States District of Columbia Judge Christopher R. Cooper upheld the $120,000 (£92,588, €102,070) penalty imposed on Donald Dewees, an American citizen currently residing in Toronto, Canada, where he set up a small consulting company.
Because the business is incorporated abroad, Dewees was required to provide certain annual information about the firm to the United States Internal Revenue Services (IRS).
Instead, for the 12 tax years from 1997to 2008 he failed to file the Forms 5471 (Information Return of US Persons with Respect to Certain Foreign Corporations).
Enter the taxman
After Dewees voluntarily disclosed his failure to file the required documentation, the IRS assessed a statutory penalty of $120,000 – $10,000 for each year of non-compliance.
Dewees then requested an abatement of the penalty for reasonable cause, which was denied.
He then filed suit in the District of Columbia Court, challenging the relevant treaty provisions as unconstitutional for violating (1) the Excessive Fines Clause of the Eighth Amendment, (2) the Due Process Clause of the Fifth Amendment, and (3) the Equal Protection Clause of the Fifth Amendment.
However, the Court moved to dismiss the complaint under Federal Rules of Civil Procedure.
“The arguments [Dewees] does raise in opposition are insufficient to save his claims. The complaint, therefore, should be dismissed,” Judge Cooper wrote in the accompanying memorandum opinion.
Specifically, the Court found that Dewees has “failed to state a claim upon which relief can be granted on his Eighth Amendment and due process claims, and lacks standing to bring his equal protection claim.”
US citizens who hold controlling interests in foreign corporations must annually file IRS Form 5471, which discloses ownership and financial information about the corporation.
In addition, US citizens living abroad must disclose holdings in foreign bank accounts over certain thresholds by filing a Foreign Bank and Financial Accounts (FBAR) report.
In 2009, Dewees learned that he had failed to comply with both requirements, and, on the advice of a tax specialist, applied to participate in the IRS’s Offshore Voluntary Disclosure Program (OVDP).
OVDP is intended to encourage taxpayers who have not disclosed their offshore assets, and who are not already under investigation by the agency, to voluntarily comply with applicable disclosure requirements.
In return for their disclosures, the program offers taxpayers compromise terms on penalties for outstanding taxes; assurance that the IRS will not refer the matter to the Department of Justice for criminal prosecution; and finality regarding previous non-disclosures.
Dewees expected the OVDP to offer him limited penalties for his non-compliance, in return for his filing of income tax returns and FBAR reports for six years, along with paying income tax owed, plus a 20% inaccuracy penalty, plus interest on both.
He would also need to pay a miscellaneous offshore penalty in lieu of all other penalties.