Feigenbaum Law

American Business Owner Faces Penalties For Failing To Disclose Canadian Bank Accounts

Tax Disputes & Litigation
December 20, 2019

We’ve had a number of blogs as of late discussing the United States’ Foreign Account Tax Compliance Act (FATCA). The legislation, introduced about ten years ago, empowers the IRS to pursue tax money from American citizens who have bank accounts in jurisdictions outside of the United States. Since the United States is virtually the only country in the world imposing taxation based on citizenship rather than residency, this means that Canadians who have dual citizenship are obligated to file tax returns in the United States even if they haven’t ever worked or lived there. However, it also applies to Americans who have business interests and hold money outside of the United States. A recent decision from the United States showcases the ways that FATCA can impact people who live in the United States but make money in Canada.

The Canadian Accounts

The defendant lived in Michigan but ran a business that had operations in Canada. As a result, she had two brokerage accounts in Canada. She first opened the accounts in 1993. Between 2005 and 2010 she withdrew $392,000 from the accounts and used that money for real estate investments in the United States. She also withdrew $60,000 to pay for her son’s private school tuition and another $20,000 for personal expenses.

The defendant did not disclose these accounts prior to 2010. In fact, in 2005, 2006, and 2008, she indicated on her United States tax returns that she did not have an interest in, or authority over, any financial accounts in a foreign county.

In addition to failing to report her accounts, the defendant also failed to report capital gains from those accounts. In the years 2003-2008 she had anywhere from $27,000 to over $1 million in capital gains from her Canadian accounts.

IRS Seeks Summary Judgment

Upon learning of these accounts, the US government moved for summary judgment against the defendant. The IRS sought $10,000 in penalties for each year the accounts went unreported. This amounted to a total of $60,000 in penalties, $10,129 in late payment penalties, and $1,688.21 in interest.

The court turned to Federal Rule of Civil Procedure 56(c), which gives courts the authority to grant summary judgment if “there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law.”

The government asserted there was no dispute that the defendant had violated FATCA. The only way these violations can avoid a penalty is if “(I) such violation was due to reasonable cause, and (II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.”

Failure to Establish Reasonable Cause

The court found the defendant did not meet her burden in establishing reasonable cause for failing to disclose her foreign financial interests. The court added, “Critically, she has not shown that she took any steps to learn whether she was required to report her foreign financial accounts. To the contrary, she notes that she hired an advisor to complete her tax returns, but fails to even suggest that she informed the advisor of these accounts.”

The defendant told the court she has yet to present evidence on this critical issue for trial. But the court responded that her time to do so was at this trial, adding that the opportunity had passed. The court held, “Because there is no dispute that (the defendant) violated §5314’s reporting requirements, and because she has not met her burden of establishing reasonable cause for that violation, the Court will grant the Government’s Motion for Partial Summary Judgment.”

Contact Feigenbaum Law for Questions or Assistance with Issues Relating to FACTA

We will continue to follow developments in this matter and other FATCA related information and will provide updates as they become available.

In the meantime, if you have any questions about this legislation and how it may impact you, contact us to learn more about how we can help.

At Feigenbaum Law, we offer cross-border tax and legal solutions. Our ultimate goal is to create the best tax strategy possible for our clients. We work with you to create a personalized solution that will streamline your compliance requirements and reduce your tax burden. Our focus is complex matters related to tax planning for individuals with high net-worth and whose assets are in multiple jurisdictions.

Contact us to learn how our skilled team can provide you with comfort in knowing that you and your money are in experienced hands. Contact us at mark@feigenbaumlaw.com, or call us at (905) 695-1269 or toll-free at (877) 275-4792.


Tagged: Cross-border tax obligations, FACTA