Posted by: Steven Toscher | August 15, 2017


After defending taxpayers for more than thirty years, I have read a lot of court opinions and you know it is not a good sign when the opinion starts “The arm of the U.S. tax man is long….” That was the language recently used by the District Court in Dewees v. United States, Case No. 16-cv-01579 (CRC) (District of Columbia, August 8, 2017).

Mr. Dewees was a “refugee” from the Internal Revenue Service’s (“IRS”) Offshore Voluntary Disclosure Program (“OVDP”).  It appears he decided not to go forward with the OVDP, but to opt out.  No doubt because he felt the penalties sought to be imposed under the OVDP were excessive.  Mr. Dewees is a U.S. citizen who lives and operates a consulting business in Canada.  One of the compliance issues he faced was the failure to file the Forms 5471 for his consulting business.

As part of the Voluntary Disclosure Program, the IRS proposed to assess a penalty of $185,862 for failing to file FBARs for the years 2003 through 2008.  That was too much for the taxpayer, so he withdrew from the OVDP.

It is not clear from the opinion what the IRS did regarding the FBAR penalties, but they did, in September 2011, assess $120,000 in penalties for Dewees’ failure to file Forms 5471 for the years 1997 through 2008.  Code Section 6038(c) authorized the IRS to impose a $10,000 penalty for each yearly failure to file, unless  it was due to “reasonable clause.”  It appears Dewees did request an  abatement based upon reasonable cause, but the IRS denied it.

Here is where it gets interesting.  In May 2015, the Canadian Revenue Agency notified Mr. Dewees that it was holding a Canadian tax refund due to his outstanding $120,000 penalty  to the IRS.  The Canadian offset  was based upon Article XXVI (A) of the United States-Canada Income Tax Convention.  Dewees paid the amounts due, plus interest and filed a claim seeking a refund which was rejected in May 2016.

The taxpayer brought an action in the District Court of the District of Columbia, (likely because he was a non-U.S. resident) and raised a number of interesting claims requesting that the Court find that the collection assistance provisions of the United States-Canada Tax Convention were unconstitutional for violating (1) the excessive fines clause of the Eight Amendment; (2) the due process clause of the Fifth Amendment; and (3) the equal protection of the Fifth Amendment.

The claims raised by the taxpayer are worth noting, but more interesting is the use of the provision of the United States-Canada Income Tax Convention which does provide for assistance in tax collection matters. Most existing United States income tax treaties do not provide for assistance in tax collection matters, but some do.  Under the common law rule, international collection is not in the cards.  However, a treaty provision can provide for collection assistance.

Even where there is a provision to provide for international assistance in collection, it has been rarely used. The Dewees case indicates this is changing.

One of the impediments of implementing international collection is resources.  If the United States does not have enough resources to collect its own taxes, how can it devote resources to collecting other countries taxes?  However, a mere offset done by computer, like what the Canadian Revenue Agency did, is easy.  Another  sign of our ever changing tax world in the digital age.

As for the claims under the Eight Amendment and the Fifth Amendment, they were all interesting, but disposed of quickly by the District Court.  The one claim that did get more attention was the Eighth Amendment claim for “excessive fines.”  The District Court devoted quite a bit of its opinion reviewing the historical case law that a “tax penalty” is outside the Eighth Amendment’s reach.  This however should be contrasted with the FBAR penalty which the courts so far have held is a penalty subject to Eighth Amendment review.  See United States v. Bussell, 117 A.F.T.R. 2d 2016-439.  2015 WL 9957826, (C.D. Calif. 2015), appeal pending (9th Cir). See also, Toscher and Lubin “When Penalties Are Excessive – The Excess Fines Clause as a Limitation of the Imposition of the Willful FBAR Penalty,” Journal of Tax Practice and Procedure, December 2009-January 2010.

Another take away from the case is the IRS assessment of $120,000 in Form 5471 penalties—for twelve (12) years.  We of course do not know what happened to the FBAR penalties, but some might think the IRS was being  vindictive here because the taxpayer opted out of the OVDP penalty.  Twelve (12) years of Form 5471 penalties—penalties  that the IRS used to waive routinely— seems like piling on.

Some things in the tax world are changing; other things never change.

STEVEN TOSCHER – For more information please contact Steven Toscher – Mr. Toscher is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., specializing in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at

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