Canada collects $120,000 in Form 5471 penalties for the IRS
by: Anthony Parent
Today we want to talk about the Dewees v US Claim for refund suit against the US government. It seems that when someone find out they have FBAR reporting requirements and decide to "come clean"...it's not always enough. If not done correctly, that decision can open a can of worms.
Mr. Dewees was a U.S. citizen living in Canada, where he operated a consulting business. In 2009, Dewees learned that he had failed to comply with the FBAR requirements, and, thereafter, successfully applied to participate in the OVDP. The IRS still assessed a penalty of over $185,000 for not filing the FBARs. Dewees refused to pay the assessed penalty and withdrew from the OVDP.
The good news? Mr. Dewees beat the IRS and the FBAR penalties were removed. The bad news? While the IRS was investigating the issue, they found that he had a Form 5471 reporting requirement for his foreign corporation because the business was incorporated abroad. Not filing Form 5471 carries a $10,000 penalty - for each year of failure to file. It also means the statute of assessment is no longer 6 years; the IRS can assess you penalties back until the beginning of time.
The IRS assessed Mr. Dewees new penalties of $120,000 for his missing Form 5471s from 1997 to 2008. Dewees requested an abatement of this penalty for reasonable cause, which was denied. Pursuant to the U.S.-Canada tax treaty, the Canadian tax authority held Dewees’ Canadian tax refund in abeyance until the IRS penalty was paid in full.
How did Canada do this?
It's thanks to something in the Internal Revenue Manual called the Mutual Collection Assistance Requests (MCAR). The United States has five bilateral tax treaties that contain broad provisions for mutual assistance in collection, also known as "MCAR". While Offshore Penalties can be collected, FBAR Penalties cannot. The countries we have these agreements with are:
Canada – All taxes including both individual and business
Denmark – Income taxes
France – Income taxes & estate taxes
The Netherlands – Income taxes
Sweden – Income taxes
On January 24, 2013, the United States and Japan signed a new Protocol to add Japan to the list. Once the new Protocol to the income tax treaty between the United States and Japan has been ratified, this section will be updated.
If you made a disclosure, look to make sure you have all your 5471s done, and properly done. We see a lot of disclosures done that are missing:
Form 5471s for dormant corps
Holding companies for asset protection
Other Delinquent Information Reporting Forms like 8865, 5472, 3520, 3520A, 8938, 920 (these can also be collected under the MCAR agreement)
If you decide to enter into a program to disclose unreported foreign accounts, make sure that the submission is done 100% correctly. Whenever we prepare a disclosure, our goal is to make it as "audit proof" as possible. We've had more and more clients come to us because a disclosure they had someone else prepare is being audited. If you need assistance, contact us. We can help. Call us at 888-727-8796 or email email@example.com. Any information you share with us will be kept confidential.