Court Sustains $10,000 Per Year § 6038(b) Penalty for Form 5471 Noncompliance for Taxpayer Who Withdrew from 2009 OVDP (8/9/17)

In Dewees v. United States, 2017 U.S. Dist. LEXIS 124989 (D.C. D.C. 2017), here, Dewees, a U.S. citizen residing in Canada, was fined $120,000 -- $10,000 per years for From 5471 noncompliance.  After assessment of that penalty, Dewees declined to pay.  He lived in Canada and apparently felt he was outside the IRS's ability to compel  payment.  Pursuant to the U.S. Canada tax treaty, however, the U.S. enlisted the Canadian tax authority to withhold a Canadian tax refund due Dewees.  At that point, Dewees paid the penalty and brought this suit to have his payments refunded on various constitutional grounds -- Eighth Amendment, Due Process and Equal Protection.  On motion of the U.S., the court dismissed the complaint.

I link the following documents:

• Complaint, here.
• U.S. Motion, here.
• Dewees' Opposition, here.
• U.S. reply, here.
• Docket Entries as of 8/9/17, here.

The key timeline that I derive from the opinion and the foregoing documents are:

1. Dewees successfully joined OVDP in 2009.  The 2009 iteration of OVDP had the following requirements:  (i) filing income tax returns for 6 years; (ii) paying income tax, 20% accuracy related penalty, and interest on both; (iii) filing FBARs for 6 years; (iii) paying an IRS penalty now called a miscellaneous offshore penalty in lieu of all other penalties, including the FBAR penalty and Form 5471 penalties.

2. It is not clear from what I saw (I did not study the documents carefully for nuance) whether Dewees completed the package including the Forms 1040 or 1040X, the 5471s, and the FBARs.  It appears that there was some commotion between the IRS and Dewees as to whether he had submitted all information.

3.  On May 26, 2010, the IRS notified Dewees that he would be "terminated from the OVDP for failure to furnish the requested 1040s and FBAR forms (for the years 2003-2008).

4.  "In June 2010, the filings requested in the correspondence dated May 19, 2010 were resent."

5.  On October 28, 2010, a $252,480 penalty assessment was made against Dewees.  Dewees alleges that the penalty assessment was "relating to FBAR non-compliance."  The Government states that it was assessed "under the terms of the OVDP."  If the Government's statement is correct, the penalty assessment was the MOP assessment in lieu of all penalties other than the income tax penalty; in Dewees case, the MOP penalty would have been in lieu of the FBAR penalty and the Form 5471 penalty.  [JAT comment:  a question I have is how the MOP could have moved to assessment without the taxpayer having signed a closing agreement inside the OVDP penalty structure, but I could not find the answer to that question.]

6.  "On November 19, 2010 the penalty assessed is reduced to $185,862, as some accounts had been double counted by the IRS."

7.  "On January 13, 2011 Mr. Dewees receives notification that he is at risk of being terminated from the OVDP program because of his failure to pay the assessed penalty."

8.  "On June 9, 2011, Mr. Dewees received a letter from Mr. Harrington [IRS Agent] requesting confirmation of his intent to no longer participate in the OVDP."

9.  "On June 16, 2011 Mr. Dewees confirms his withdrawal from the OVDP based on the excessive amount of penalties owing. The penalties were removed from his account."  [JAT comment:  this would be consistent with the penalties being MOP rather than FBAR because the MOP could not be assessed unless he completed OVDP without opting out or being removed.]

10.  "On September 20, 2011 Mr. Dewees receives a letter from Mr. Harrington dated September 9, 2011, imposing a new $120,000 of penalties for the late filing of Form 5471. The letter indicates that reasonable cause for failure to file will be considered."  [JAT Comment:  This is consistent with Dewees being removed from OVDP because he would have lost his Form 5471 penalty protection.]

11.  Now, if the taxpayer truly were removed from OVDP, he should have been subject to risk of assessment of FBAR penalties.  From what I have seen, it is not clear that FBAR penalties were imposed.  I infer from the IRS's imposition of maximum Form 5471 penalties that the IRS did not think he was a nonwillful actor, but still there is no indication what, if anything, happened on the FBAR penalties.

Interesting Offshore Account Malpractice Opinion Denying Summary Judgment (4/1/17; 4/6/17)

In Miksic v. Boeckerman Grafstrom Mayer, LLC, 2017 U.S. Dist. LEXIS 46906 (D MN 2017), here, court opens with an short summary of the case:

The Internal Revenue Service ("IRS") assessed substantial taxes, monetary penalties, and interest against Plaintiff Boris Miksic for his failure to file U.S. tax forms during tax years 2005 to 2010, and not disclosing his interests in and income from foreign trusts, businesses, and bank accounts. Miksic filed this accounting malpractice action alleging those errors were due to negligent tax preparation by Defendants Boeckermann Graftstrom Mayer LLC, formerly known as Johnson, West & Co. P.L.C., Boeckermann Graftstrom Mayer, P.A., and Johnson West & Co. P.L.C. (collectively "Defendants"). Miksic also contends that as a result of Defendants' negligence, he changed accountants and retained legal counsel to respond to the IRS audit and to bring this action.

In the opinion, the court (i) denies the accounting firm's motion for summary judgment in major part, (ii) denies the accounting firm's attempt to exclude or limit the plaintiff's expert witness, and (iii) granted the accounting firm's summary judgment on the Form 5471 penalties that had been abated by the IRS.

I deal with only some of the issues discussed in the opinion and with certain other matters.  I sometimes refer to the accounting firm as the accounting firm or the defendant.  I sometimes refer to the plaintiff as the plaintiff or the taxpayer.  For background, I offer also the following (without exhibits):

• The plaintiff's (taxpayer's) complaint, here.
• The defendant's (accounting firm's) answer, here.
• The defendant's memo in support of motion for summary judgment, here.
• The plaintiff's (taxpayer's) response, here.
• The defendant's (accounting firm's) reply, here.
• The docket entries in the case as of 3/31/17, here.

I offer the following brief background probably known to most readers but not covered in the opinion:  In 2009, the IRS began its most recent offshore account initiative with the UBS deferred prosecution agreement and then the first round of OVDP for U.S. persons having previously unreported offshore accounts.  The U.S. and offshore press reports of this initiative in 2009 and later years were significant, which is probably an understatement.  Those practicing in this are will recall that UBS U.S. customers received letters in 2009 regarding their accounts, notifying them the account information may be turned over to the IRS or DOJ and notifying them of the IRS OVDP.  Some of the UBS account holders' information had already been supplied to DOJ and thus were ineligible for OVDP.