IRS Enforcement Tools Against Overseas Taxpayers:
While the IRS’s ability to collect from taxpayers abroad is more limited than those living in the United States, the IRS does have a number of avenues to pursue the income and assets of those living overseas. Pursuing delinquent taxes has been a top IRS priority for the last decade. In 2014, the Treasury Inspector General for Tax Administration (TIGTA) audited the IRS’s policies and procedures for international collections and found them wanting. TIGTA made seven recommendations to the IRS to improve the efficacy of its international collection efforts, recommendations which the IRS agreed to work towards implementing. In the years following TIGTAs report on the IRS’s international collection efforts, the IRS has been ramping up it’s collection efforts against international taxpayers using a bevy of tools at its disposal.
Customs Holds and the Writ Ne Exeat Republica:
In particular, TIGTA recommended that the IRS take better advantage of the Treasury Enforcement Communications System (TECS) for delinquent taxpayers. Once a taxpayer is listed on the TECS, the U.S. Department of Homeland Security (DHS) notifies the IRS whenever a listed taxpayer travels to the United States. A Memorandum of Understanding between the IRS and DHS allows Customs and Border Protection Officers to stop delinquent taxpayers identified on the TECS to collect their contact information of where they will be staying while in the United States, attempt to locate sources of income or assets, etc. If the IRS adds your name to TECS, you should be notified via a Letter 4106 that you may be stopped and subject to an interview by customs officials, though receiving notice from the IRS requires that the IRS knows your mailing address abroad, which isn’t always the case. While referral to the TECS is rare (there were around 1,700 taxpayers listed on the TECS in 2014), the specter of being stopped and questioned upon entry to the country due to outstanding tax liabilities has left many U.S. taxpayers hesitant to return to the United States, even if only briefly.
When combined with the IRS’s ability to bring suit and file a Writ Ne Exeat Republica, the prospect of returning to the United States with a delinquent tax liability becomes even more daunting. A Writ Ne Exeat Republica (literally, “let him not leave the republic”) is authorized by §7402(a) of the Internal Revenue Code, and allows the IRS to petition a court to issue an order allowing a U.S. taxpayer to: be detained and taken into custody unless they post adequate security for the outstanding liability, to be held in custody pending a final evidentiary hearing on the writ, to be required to provide testimony and documentation as to the value and extent of all assets, and to be prohibited from transferring or encumbering assets. On the other side of the coin, if you’ve come into the United States as a non-U.S. citizen and intend to leave the country with an outstanding tax debt, the IRS can issue a Customs Order or Prevent Departure Order, which instructs U.S. Customs to detain a non-citizen taxpayer with delinquent tax liabilities to prevent them from leaving the country until their tax matter is resolved.
While customs holds and Writs Ne Exeat Republica are infrequently used by the IRS, they are used, most frequently when your case has been assigned to an international Revenue Officer who has made repeated attempts to contact you about your outstanding taxes that have gone ignored.
IRS Passport Revocation:
Since 2018, the IRS has been rolling out its congressionally-mandated passport revocation initiative, which I’ve addressed in more detail here. In short, owing over $53,000 to the IRS could seriously frustrate your ability to conduct your affairs abroad if you rely on your United States passport to do so. This new tool has given the IRS the option of sitting back and waiting for expats to come forward to resolve their taxes in order to obtain a passport, a necessity for many Americans living abroad. The IRS began certifying taxpayers to the State Department in 2018, first targeting those with large delinquent debts and working their way down the line. If you meet the criteria for certification, it’s not a matter of if the IRS will refer your account to the State Department, but when. By all accounts, the program has been a successful one for the IRS; as of October 2019, the program had resulted in $1.2 billion in tax payments from taxpayers who the IRS reported to the State Department. Fortunately, there are a number of options for dealing with a passport certification, and once you’ve entered into an agreement with the IRS, the hold on your passport should be lifted.
Mutual Collection Assistance Requests:
Another tool in the IRS international collection toolbox is what’s known as Mutual Collection Assistance Requests, or MACRs. The United States has entered into tax treaties with six countries that allows the United States to request the other signatory country to collect delinquent taxes from taxpayers residing within those countries on behalf of the United States. As of the date of this writing, the IRS has mutual collection assistance agreements with the following countries: Canada, Denmark, France, the Netherlands, Sweden, and most recently, Japan. The treaties provide that each country, upon request by the United States, may take whatever actions it would take to collect its own taxes in order to collect on behalf of the United States. This includes the collection of U.S. taxes through the treaty partner’s bankruptcy proceedings. The MACR provisions also allow the exchange of information related to the correct determination of a taxpayer’s income tax liability, or the collection of that liability (including tax returns and filings, bank records, and business records).
The types of taxes eligible for MACR enforcement vary between each contracting country, and different countries have different rules regarding collecting taxes against those with citizenship in the foreign country. The treaties with Canada and Denmark, for example, provide that they will collect from taxpayers who were not their citizens during the tax periods to which the U.S. tax liability relates, even if they subsequently became citizens. By contrast, the treaties with France, The Netherlands, Japan, and Sweden provide that those countries will not collect from their own citizens.
Therefore, if you live in a MACR country and do not have dual citizenship, you’re at risk of your IRS problem ballooning into an issue between you and the revenue authority in the country in which you reside. Rather than risk collections on two fronts, if you believe you’re at risk of a MACR referral, you’re better off reaching out to the IRS to attempt to enter into a collection alternative. Even if the IRS has already referred you for mutual collection assistance, they will generally withdraw the request if you reach out to them and negotiate for a collection alternative.
Levy on Domestic Branch of a Financial Institution:
Many taxpayers believe that if their funds are held in a foreign financial institution that their assets are safe from IRS levy, however that’s not always the case. However, 26 CFR § 301.6332-1 permits the IRS to levy assets held outside of the United States in a foreign financial institution if that financial institution is “engaged in the banking business in the United States or a possession of the United States.” While many smaller, local banks in a foreign country may not meet the requirements to be subject to levy, many U.S. taxpayers living abroad prefer to utilize larger, international banking institutions in order to better facilitate international travel. However, if your bank in a foreign country has a branch in the United States, your assets held at that bank, even if located overseas, could be subject to IRS levy.
Suit to Repatriate Property:
If the IRS has exhausted other collection efforts, they can request a federal judge issue a Repatriation Order upon a showing that: (a) the taxpayer in question owes an outstanding tax liability, (b) there’s a reasonable basis that the taxpayer has assets outside of the U.S., (c) levy on domestic assets is not sufficient to satisfy the tax liability, and (d) the U.S. is able to get personal jurisdiction over the taxpayer (i.e. the taxpayer is either in the U.S. or is likely to be returning to, or passing through, the United States). If the suit is successful, the taxpayer is ordered to return property to the United States, subject to custody of the court, which will then be remitted to the IRS. If a taxpayer ignores a repatriation order, the next step is typically for the IRS to request the issuing judge to find the taxpayer in contempt and proceed to criminal prosecution.
International Arrest, Extradition, and Prosecution:
Though rarely used, the final tool the IRS has to collect from international scofflaws is to bring federal criminal charges and request detention and extradition by authorities in a foreign country. The viability of doing so depends largely on the agreements in place between the United States and the specific country in question. A detailed overview of the policies and procedures surrounding IRS criminal extradition is outside the scope of this article, but bear in mind that it is an option for the IRS, particularly if you’re a high-profile individual or are otherwise engaged in flaunting non-compliance with the United State’s tax laws.
If you or someone you know is living outside of the country and has received demand notices from the IRS regarding delinquent taxes, please contact us so we can discuss your options for resolving the outstanding balance in a way that minimizes the impact on your life outside the country. Even if you haven’t received notice from the IRS, but believe you may owe IRS taxes, it’s worth investigating where you stand with the IRS to avoid potential issues in the future; in many instances the IRS has been attempting to collect from an international taxpayer for a number of years, with ever increasing penalties and interest, without the taxpayer even being aware, as the IRS cannot locate them overseas. Sometimes the liabilities can be resolved simply by filing returns to correct erroneous IRS assessments. Eventually the IRS will catch up with you, and you’re better off being proactive about resolving your outstanding debts than waiting for the IRS to ramp up its international collection efforts, most of which are geared towards making it impossible to live your life abroad.