International Collections Enforcement and Voluntary Disclosures

• Author: David Kerzner, David W. Chodikoff
• Pages: 307-341

307

chapter ten

INTERNATIONAL COLLECTIONS

ENFORCEMENT AND VOLUNTARY

DISCLOSURES

A INTRODUCTION

This chapter gives an overview of the voluntary disclosure process in Canada

and the United States. It also considers the US federal legal regime for the re-

porting of foreign bank and f‌inancial accounts under the Bank Secrecy Act.1 The

importance of the BSA cannot be overstated; as described below, its penalty

provisions have been a major weapon wielded by the IRS against American cit-

izens with bank accounts outside the United States. This chapter will provide

important insight for professionals in the tax, accounting, and wealth manage-

ment industries who have clients that are US non-f‌ilers or have of‌fshore assets

undeclared to either the IRS or CRA. This chapter will also be particularly

relevant to governments and students contemplating policy changes to inter-

national tax law surrounding exchange of information, citizenship-based tax-

ation, and the unique dilemma facing the US expatriate community in Canada,

the United Kingdom, the European Union, and elsewhere.

Congress, in passing the BSA, observed in 1970, “These days when the

citizens of this country are crying out for tax reform and relief, it is grossly

unfair to leave the secret foreign bank account open as a convenient avenue

of tax evasion.”2 This chapter reviews the of‌fshore account reporting rules

1 Pub L 91-508, Tit II, 84 Stat 1118, 10/26/1970, codif‌ied as amended at 12 USC 1829b, 12 USC

1951–1959, and 31 USC 5311–5314; 5316–5332 [BSA]. Regulations implementing Title II of the

BSA (codif‌ied at 31 USC 5311f‌f) appear at 31 CFR Part 103 and, ef‌fective 1 March 2011, at 31

CFR Chapter X: see note 38, below in this chapter.

2 Quoted in Itai Grinberg, “Beyond FATCA: An Evolutionary Moment for the International Tax

System” (2012) [unpublished, archived at the Georgetown University Law Center, The Schol-

arly Commons, Paper 160] at 12, n 45, online: http://scholarship.law.georgetown.edu/fwps_

308 • InternatIonal tax evasIon In the Global InformatIon aGe

under the BSA and their more recent enforcement by the US Department of

the Treasury and the IRS. Although the BSA has been dormant for most of its

forty-year history, it f‌igures prominently in the US government’s most recent

ef‌forts to combat tax evasion by US citizens with Swiss bank accounts and in

the US government’s series of of‌fshore voluntary disclosure initiatives, which

have been criticized for their lack of fairness. Recent IRS enforcement of the

BSA’s penalty provisions strikes a chord of injustice and is motivating a new

drive of expatriation by US citizens living abroad. Simply put, the draconian

f‌inancial penalties for Report of Foreign Bank and Financial Accounts (FBAR)

delinquencies were intended for tax evaders, and those Americans who have

lived all or most of their lives in Canada, the United Kingdom, or the Euro-

pean Union are not tax evaders. When one is examining the international tax

policy surrounding exchange of information, it is not enough to just analyze

the mechanism of exchange, for example, the Foreign Account Tax Compliance

Act.3 One must also consider what the US government will do with the infor-

mation that it receives from its treaty partners. The discussion in this chap-

ter of US enforcement of FBAR penalties against Canadians who absolutely

never heard of the FBAR and who could not have had the required willful in-

tent described by US Supreme Court Justice Ruth Bader Ginsburg (discussed

below) in the early days of US voluntary disclosure programs, in 2009 and

2011, showcases the derailment of the principle of equity in US international

tax policy. Finally, this chapter provides an overview of the collections en-

forcement provisions in the Convention between Canada and the United States

of America with respect to Taxes on Income and on Capital4 and gives vital guid-

ance for lawyers and accountants with delinquent clients, whether in Canada,

the United Kingdom, the European Union, or elsewhere. Professionals with

clients who have undeclared foreign accounts and assets (particularly in tax

haven jurisdictions) need to take great care as a result of new information

exchange developments such as FATCA (described in Chapter 9) and the

Swiss Bank Program (described in Chapter 5). The IRS may possess detailed

information regarding a client’s accounts, including records of the client’s

communications with a foreign f‌inancial institution. As discussed below, the

recent introduction, in 2016, of rules regarding non-willfulness certif‌ication

under the streamlined procedures for US taxpayers living abroad adds a new

papers/160, citing United States, HR Rep No 91-975 at 4 (1970), reprinted in 1970 USCCAN

4394 and 4397.

3 Subtitle A of Title A of the Hiring Incentives to Restore Employment Act of 2010, Pub L No 111-147

enacted on 18 March 2010 [FATCA].

4 September 1980 (as amended to the protocols signed on 14 June 1983, 23 March 1984, 17 March

1997, 29 July 1997, and 21 September 2007) [Canada–US Tax Treaty].

International Collections Enforceme nt and Voluntary Disclosures • 309

measure of risk for non-f‌ilers, especially those living in Canada, the United

Kingdom, and the European Union.

B CANADIAN VOLUNTARY DISCLOSURES PROGRAM

The Voluntary Disclosures Program (VDP), which is administered by CRA, is

a discretionary program under the fairness provisions in the Income Tax Act,5

Excise Tax Act,6 Excise Act, 2001,7 Air Travellers Security Charge Act,8 and Soft-

wood Lumber Products Export Charge Act, 2006.9 CRA created the program to

enable taxpayers to request relief from penalties and arrears interest under

the various statutes that it administers. In the context of the Act, section

220(3.1) provides the Minister of National Revenue (Minister) with the legis-

lative authority to waive penalties and interest with respect to federal in-

come tax.10 And even though some provinces have their own regime (Ontario,

for example, does not participate in the CRA program in respect of provincial

income taxes), the federal Minister has the power to waive penalties and in-

terest on behalf of the provinces in respect of provincial income taxes admin-

istered by CRA. The revenue authorities of Alberta and Quebec administer

their own provincial corporate tax systems and operate their own voluntary

disclosure programs separately from CRA.

The purpose of the VDP is to allow taxpayers to correct inaccurate or

incomplete information or to disclose information not previously reported.

If the conditions for making a valid disclosure are met, the taxpayer will be

required to pay the additional amounts of tax related to the disclosure but

will not be liable for penalties, and CRA can, and typically does, grant interest

relief. Furthermore, CRA will not seek to prosecute the taxpayer for criminal

of‌fences relating to the previous errors or omissions.

CRA outlines in Information Circular IC00-1R4 the conditions that must

be met before a disclosure will be considered valid.11 There are four condi-

tions. First, the disclosure must be voluntary.12 The question that often arises

5 RSC 1985, c 1 (5th Supp) [Act].

6 RSC 1985, c E-15 [ETA].

7 SC 2002, c 22 [EA].

8 SC 2002, c 9, s 5 [ATSCA].

9 SC 2006, c 13 [SLPECA]. The penalty and interest relief provisions are in the Act, above note 5,

s 220(3.1); ETA, above note 6, ss 88 and 281.1; EA, above note 7, ss 173 and 255.1; ATSCA, above

note 8, ss 30 and 55; and SLPECA, ibid, s 37.

10 Act, above note 5, s 220 (3.1).

11 Canada Revenue Age ncy, Information Circular IC00-1R4, “Voluntary Disclosures Program”

(21 March 2014) [Information Circular IC00-1R4].

12 See ibid at paras 32–34.