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If you are a foreign resident but a U.S. taxpayer, it can be especially difficult to find the right way to challenge an unfair tax assessment. You may question if internal IRS appeals are enough, or whether you have the right to refuse payment and sue. As recent federal district court case shows, the general rule for U.S. taxpayers living abroad (or in the country) is to pay first, sue second.
If you are a U.S. citizen living abroad you might assume you only have to pay taxes where you live. That’s not true. U.S. citizens and permanent residents are still required to file tax returns and pay taxes in the U.S., no matter where they are living. However, the IRS does recognize that it can be hard to gather all the necessary information to file your U.S. tax return while living overseas. U.S. citizens, permanent residents, and active duty military service-members living abroad receive an automatic 2-month extension to file their tax returns.
Donald Dewees didn’t live up to those requirements. An American citizen, Dewees moved to Canada in 1971. In 1979 he opened a consulting business incorporated in Canada. He and the company paid Canadian taxes, but he never filed U.S. tax returns. In 2009, Dewees began to worry that he may owe the IRS money, so he applied to participate in the now-closed Offshore Voluntary Disclosure Program (OVDP). Based on his acceptance into the program he was assessed $185,862 in tax penalties. He didn’t like that number and withdrew from the OVDP. In the investigation that followed, the penalty was lowered to $120,000.
Dewees didn’t pay the tax penalty. Instead he challenged the amount through the IRS Taxpayer’s Advocate’s Office and the IRS Appeals Office. When that still didn’t result in a number he liked, Dewees refused to pay. In 2015, Canada withheld his 2014 tax refund under a tax treaty with the U.S. He sued to get the money back, saying he hadn’t been given an opportunity to challenge the tax penalty in court before he had to pay it.
Dewees relied on a U.S. Constitutional theory called “due process.” The Fifth Amendment says in part:
“No person shall … be deprived of life, liberty, or property, without due process of law…”
Courts have long established that “due process” includes two things: (1) notice of what is going on and (2) an opportunity to be heard or object. Dewees said that because U.S. taxpayers generally have to pay first and sue second, they are not given due process before tax penalties are assessed.
The court disagreed. It said Dewees had already had two opportunities to challenge the tax penalty through the IRS administrative systems. The Constitution didn’t require the court to give him “a third bite at the apple--before review becomes contingent on pre-payment of the tax penalty.”
That’s not to say Dewees wasn’t entitled to take the IRS to court over what he saw as an excessive tax penalty. U.S. taxpayers living abroad or here in the country have the right to challenge tax assessments, FBAR penalties, and other IRS determinations in court. But they have to pay the penalty first, and then sue the IRS to get their money back.
As a U.S. taxpayer living abroad, it can be hard to keep up with the IRS reporting requirements, tax returns, and mandatory FBAR filings. You need an accountant and a tax attorney who each focus on handling foreign accounts. Be sure to ask your U.S. accountant if they have worked on international accounts before you trust them to keep your money safe, and you out of court.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions about your responsibilities as a U.S. taxpayer living abroad, contact Joe Viola to schedule a consultation.