Written on behalf of Feigenbaum Consulting
Our offices have recently filed a Writ of Certiorari, a request to appeal to the United States Supreme Court, asking that court to review lower court level decisions made with respect to a client who had significant IRS penalties levied against him.
Our client, an American who has lived in Canada since the 1970’s, had not filed any income tax statements in the U.S. since his relocation north of the border.
The man eventually joined the Offshore Voluntary Disclosure Program (OVDP), a former IRS initiative, which we’ve previously blogged about. He was accepted into the OVDP in late 2009 and was eventually informed that he owed $252,000 in penalties for not filing U.S. tax returns as a non-resident American citizen.
The man ended up withdrawing from the OVDP and was subsequently subject to an additional $120,000 in penalties for the late filings of Form 5471 (a document concerning a non-resident U.S. citizen’s ownership of and financial information about a foreign corporation).
The IRS neglected to issue a Notice of Deficiency, which would have allowed the man to formally appeal the IRS’ penalty assessment in court. When he asked for the additional $120,000 fine to be withdrawn, the IRS issued another $10,000 in penalties. The man paid the $10,000, but the IRS denied his request to have the other penalties withdrawn, with no explanation provided for the denial.
In the interim, the Canada Revenue Agency informed the man that they would be holding his 2015 tax return until he settled the outstanding amounts owing to the IRS.
The man sent a cheque for the $120,000, plus interest. He also filed a claim in the U.S. District Court requesting a refund of that amount on the grounds that the sections of the Canada-United States Tax Convention which applied in these circumstances were unconstitutional.
The Initial Decision
The District Court dismissed the claim because, among other things, the man did not have standing in court since he had not been subject the Streamlined Filing Compliance Procedures (SFCP). Notably, the SFCP had only been introduced after the IRS rejected the man’s appeal to have his penalties withdrawn.
The man appealed to the Circuit Court.
The Appeal Decision
On appeal, the Circuit Court reversed the decision on standing on the grounds that the man would never have been able to join the SFCP based on the timing of his withdrawal from the OVDP. Any effort to join the SFCP would have been futile.
However, the Circuit Court ultimately concluded that the man’s rejection from the SFCP was not unconstitutional because there was a rational connection to a legitimate government purpose.
What Exactly is A Writ of Certiorari?
Parties who are not satisfied with the decision of a lower court, like the man in question, can petition the U.S. Supreme Court to hear their case. The main way to do this is to ask the court to grant a writ of certiorari, which is essentially a request that the Supreme Court order a lower court to send their record of the case for review.
The Supreme Court is not under any obligation to hear cases put before them for review, and generally will only do so if the case at issue:
- Has national significance;
- Might harmonize conflicting decisions in the federal Circuit courts; and/or
- Could set a precedent.
Of the roughly 7,000 cases submitted for review each year, the Supreme Court will only accept between 100-150.
The Supreme Court has its own set of rules. According to these rules, four of the nine Justices must vote to accept a case. Five of the nine Justices must vote in order to grant a stay, e.g., a stay of execution in a death penalty case. Under certain instances, one Justice may grant a stay pending review by the entire Court.
Grounds for Review
We are asking the Supreme Court to review this matter based on a number of grounds:
- There has never before been a decision as to the constitutionality of the Convention between the US and Canada about the right to due process. Essentially, there is currently no meaningful process in place for review of an assessment before it is enforced, therefore violating the constitutional rights of citizen taxpayers.
- It is a violation of a citizen taxpayers 5th amendment rights of equal protection to deny them entry to SFCP just because they were not part of OVDP at the time that SFCP was created, particularly when people who have cases that began after the SFCP was created don’t face the same issue. This creates an unfair distinction.
- The Supreme Court has previously held that the Excessive Fines Clause, designed to protect people from unreasonably high fines and bail, applies to both criminal and civil penalties. However, lower courts have said that it doesn’t apply to fines under 26 USC 6038 (where the fines in this case stem from) because they are compensatory (i.e. making up for a specific loss) and not punitive (i.e. a punishment). In our view, a fine can be both compensatory and punitive, as is the case here. Here, the $120,000 fine is grossly out of step with what the man was fined for.
We will continue to provide updates as they become available. In the meantime, if you have questions about this ongoing matter or about tax compliance in multiple jurisdictions, contact Feigenbaum Law. We provide our clients with custom solutions to their personal or corporate tax needs. Our unparalleled knowledge of US and Canadian tax makes us leaders in this field. We offer services to clients on both sides of the border.
In addition to the SFCP (through which approximately 65,000 taxpayers have become compliant), the IRS also has a number of compliance programs in place. There has been no indication that the IRS will stop the Streamlined Filing Compliance Procedure.