Clients may risk steep penalties if they don’t file U.S. tax forms

Haven’t filed all your required U.S. tax paperwork? If you’re really unlucky, you might get sued.

Last May, the U.S. Department of Justice (DOJ) sued Jeffrey P. Pomerantz — a U.S.-Canadian dual citizen resident in Canada — for more than US$860,300 in penalties and interest for failing to file his FBAR bank disclosure forms, even though he filed his tax returns.

This case is one of the first known instances of the enforcement of FBAR penalties against a U.S. citizen living in Canada. U.S. citizens who have bank accounts abroad must file an FBAR each year if they have more than US$10,000 in aggregate in bank and other financial accounts outside the United States. Further, accounts over which the U.S. taxpayer has signing authority also have to be reported.

The penalties for failing to file an FBAR are harsh, ranging from US$10,000 per account to the greater of US$100,000 or 50% of the balance of the account if the violation was wilful. It is up to the IRS to establish wilfulness, the legal test for which is a voluntary, intentional violation of a known legal duty.

Court documents indicate that on March 3, the DOJ “sought an order to serve the summons and complaint on Pomerantz and his lawyer via international mail and courier.” This motion was granted on March 17.

Read: 4 structures to protect Canadians from the U.S. estate tax

Facts of the case

According to court documents, Pomerantz is a dual Canadian-U.S. citizen living in North Vancouver, B.C. Aside from a period between late 2008 and mid 2009 during which he lived in California, he has been a Vancouver resident since 2001. The complaint alleges he personally owns two CIBC chequing accounts, as well as several companies that in turn own foreign bank accounts in Switzerland. The U.S. government wants to collect more than US$860,300 in FBAR penalties and interest arising from Pomerantz’s alleged wilful failure to report the above accounts in 2007, 2008 and 2009.

Although Pomerantz has not formally been served with the documents, the DOJ has expended significant effort to track him down, including:

• extensive searching on the internet for his contact information;
• sending multiple notices by Fed-Ex to different addresses he has used;
• calling his phone number;
• calling his lawyer.

From the court documents, it’s not clear how the DOJ discovered Pomerantz’s failure to report his bank accounts. The IRS previously audited Pomerantz’s U.S. tax returns that he prepared himself. According to court documents, the audit resulted in more tax owing and penalties. Amongst the additional taxes identified in the audit, Pomerantz had allegedly not reported income from the sale of home furnishings and from the sale of a Toyota.

Read: Tax consequences of renouncing U.S. citizenship

A U.S. Tax Court case concerning the assessed additional tax is still ongoing. While the IRS audit began in 2010, the FBAR penalties in question were not assessed until May 2014 for tax year 2007, and March 2015 for tax years 2008 and 2009. Potentially, the unreported accounts were discovered during the audit, but this cannot be determined from the court documents.

Although CRA does not assist in the collection of FBAR penalties against assets in Canada, the consequences of non-compliance can be severe. In fact, there are several implications of the Pomerantz case for U.S. citizens living in Canada:

• It shows that the IRS scrutinizes U.S. taxpayers who live in Canada.
• It illustrates the risks associated with not properly filing a U.S. tax return and/or FBAR forms.
• Considering these risks, U.S. citizens who have never filed a U.S. tax return should get caught up on their U.S. returns. Failing to file U.S. returns could lead to expensive penalties, but also difficulty accessing the U.S. Under U.S. immigration law, a U.S. citizen is required to use a U.S. passport to enter the U.S. But a new law allows the U.S. government to confiscate a U.S. passport if a taxpayer owes more than US$50,000 in back taxes.
• FATCA increases the risk to U.S. citizens even further. Under FATCA, the IRS receives information on bank accounts held by U.S. citizens in Canada from Canadian financial institutions. This makes it easy for them to determine whether or not a U.S. citizen living in Canada has reported all bank accounts on an FBAR form and instigate penalties as appropriate.
• A U.S. citizen in Canada who has not filed their U.S. taxes should take the necessary steps to catch up on their taxes using the streamlined procedure if only to renounce their U.S. citizenship.

Max Reed

Tax & Estate

Max Reed , LLB, BCL, is a cross-border tax lawyer at Polaris Tax Counsel in Vancouver. max@polaristax.com