DOJ Files Lawsuit Against Canadian Resident with Dual U.S. Citizenship

On this tax blog we have long warned that as the strict enforcement of the requirement to file a Report of Foreign Bank Account (FBAR) and other offshore information reports became more common and accepted, that the U.S. government would continue to push the envelope. In the past, we have predicted that the IRS may make OVDP terms less favorable. Alternatively, we have speculated that while FBAR covers all U.S. taxpayers, the IRS and DOJ may redouble their enforcement efforts targeting individuals living outside of the United States.

For dual nationals and U.S. expatriates who gambled that the IRS and DOJ would continue to focus compliance efforts on individuals living in the United States, there is bad news. The U.S. government is pursuing FBAR penalties against Canadian residents with U.S. dual citizenship. This penalty can theoretically be sought against any dual national who is a U.S. taxpayer.

Why Is a Canadian Resident Facing FBAR Allegations?

All U.S. taxpayers are required to report their offshore or foreign accounts when their assets exceed certain thresholds. In the context of the duty to file FBAR, the obligation is triggered when the taxpayer holds or has signature authority over one or more foreign accounts provided that the value of the accounts aggregates to $10,000 or more at any point in the year. The obligation to file FBAR is incurred even if the value of the accounts only surpasses the filing threshold momentarily. It is also important to note that taxpayers with an obligation to file FBAR, may also be required to make an additional FATCA disclosure. In any case, all U.S. taxpayers are required to file FBAR when the above conditions are met. This includes U.S. citizens living abroad and dual nationals who also have U.S. citizenship.

All U.S. taxpayers are required to report their offshore or foreign accounts when their assets exceed certain thresholds. In the context of the duty to file FBAR, the obligation is triggered when the taxpayer holds or has signature authority over one or more foreign accounts provided that the value of the accounts aggregates to $10,000 or more at any point in the year. The obligation to file FBAR is incurred even if the value of the accounts only surpasses the filing threshold momentarily. It is also important to note that taxpayers with an obligation to file FBAR, may also be required to make an additional FATCA disclosure. In any case, all U.S. taxpayers are required to file FBAR when the above conditions are met. This includes U.S. citizens living abroad and dual nationals who also have U.S. citizenship.

In this matter, United States v. Jeffrey P. Pomerantz, Pomerantz is a U.S. citizen who resides in Canada. The accounts in question are two accounts with the Canadian Imperial Bank of Commerce (CIBC) and one with Royal Bank of Canada (RBC) along with several Swiss accounts. Pomerantz filed his taxes, but admits that he did not file associated FBARs for calendar year 2007, 2008 or 2009.

Pomerantz is accused of failing to report the Canadian accounts and several additional Swiss accounts. Prosecutors also allege that Pomerantz opened a shell entity in Turks & Caicos which in turn opened several Swiss bank accounts. The FBAR penalties faced by Pomerantz total to more than $800,000 (USD). Pomerantz states that the penalties sought by U.S. prosecutors are inflated because he sold a house and placed the proceeds into a Canadian account thus placing the value of the home into the penalty calculation. However, this does appear to be a proper application of penalty procedures, so it is unclear on what grounds Pomerantz bases his claim that penalties are “inflated.” Perhaps he simply means that penalties imposed for willful violations of a duty to file FBAR are potentially jaw-dropping.

What Types of Accounts Should Dual Citizens Worry About?

Unfortunately, it is extremely easy for a well-meaning taxpayer to run afoul of FBAR’s reporting requirements. For one, Registered Retirement Savings Plan (RRSP) are extremely common in Canada. Many foreign nations have similar types of retirement savings plans. Provided that the individual’s foreign accounts exceed the $10,000 threshold, proper treatment of Canadian RRSPs requires a U.S. taxpayer to report the account as part of his or her FBAR disclosure. However, due to a tax treaty between the United States and Canada, tax on RRSP income is deferable until retirement provided that the taxpayer makes the proper election.

For taxpayers living in other foreign nations, there is a strong likelihood that if you hold a non-ERISA, pension plan-like retirement savings account they may be treated as a foreign trust. Income derived or accruing from a foreign trust is taxable for US purposes even without distribution and the likelihood of a duty to report the account via FBAR is high. One exception to taxable foreign trust treatment occurs when the retirement savings account is akin to U.S. Social Security and there is a tax totalization agreement in place between the US and the foreign jurisdiction or alternatively a tax treaty exclusion applies in which case the income accruing offshore will not be taxable until a taxable distribution is made.

Other foreign accounts that should be included in FBAR filing threshold aggregation and, if required, the actual FBAR include:

* Checking and savings accounts held at foreign financial institutions

* Financial accounts held at a foreign branch of a U.S. financial institution

* Indirect interests in foreign financial assets through an entity

* Foreign-issued life insurance or annuity contract with a cash-value

* Foreign mutual funds

* Foreign hedge funds

* Foreign privately equity funds

* Foreign life insurance policies

* Foreign annuities

Analysis of tax payment and offshore account reporting obligations relating to foreign retirement accounts can quickly become extremely complex and nuanced. When assessing these issues, dual nationals and other taxpayers with an obligation to file U.S. taxes would be prudent to seek the guidance of an experience international tax professional.

Work with Experienced International Tax Lawyers and Tax Professionals

Dually certified Tax Attorney and CPA David Klasing and his staff of CPAs & EAs have extensive experience assisting taxpayers with Domestic and International Tax concerns. If you are worried about a potential failure to file FBAR, or unreported sources of foreign income and the significant civil and criminal tax penalties that can result, the Tax Law Offices of David W. Klasing may be able to assist you in coming back into compliance with the U.S. Tax Code while mitigating the penalties you face. To schedule a confidential reduced rate consultation, call our Los Angeles or Orange County tax law offices at 800-681-1295 or contact us online.

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