Resolving IRS Tax Liabilities While Living Abroad - Special Considerations:With each passing year, more and more US taxpayers move abroad. As the digital age marches on, barriers to international commerce have fallen by the wayside, and partaking in the global economy from anywhere on earth has never been easier. But the same tools that have made it easier for taxpayers to carry on their affairs abroad have made it easier for the IRS to follow you around the globe as well. With the globalization and digitization of financial institutions, reporting requirements imposed by the US government on foreign financial institutions under FATCA, and continually expanding IRS enforcement powers against those living abroad, the IRS has never had more tools to collect from taxpayers abroad. “Waiting it out” abroad is seldom a sensible option. In most instances, proactively reaching out to the IRS and resolving your outstanding taxes is the best course of action. However, there are a number of aspects of resolving a tax matter unique to taxpayers living abroad, that should be given consideration before reaching out to the IRS.
The IRS Collection Clock is Paused While You’re Abroad:
The general rule is that the IRS has ten years from the date a tax liability is assessed to collect on that liability; if the IRS doesn’t collect the full amount owed during that ten year window, the balance remaining unpaid is written off on the Collection Statute Expiration Date (CSED). However, leave the United States for a continuous period of six months or more, and the running of that ten-year window is paused indefinitely pending your return to the country (IRC §6503(c)). Furthermore,even if you leave the country with less than six months remaining for the IRS to collect on a balance, the code provides that the CSED cannot expire for at least six months subsequent to your return to the country. This indefinite tolling means that one can’t just “ride out” a tax liability by living overseas; if the IRS becomes aware that you’re living overseas, they’ll likely pause the running on the statute of limitations on collection until you return to the country.
Furthermore, this indefinitely tolled CSED has implications for working with the IRS to resolve your tax liabilities while abroad. For example, in order to qualify for the IRS to consider an Offer in Compromise, a taxpayer generally must demonstrate that the IRS should not expect to be able to collect the tax owed, out of the taxpayer’s assets and monthly income multiplied by the number of months the IRS has remaining to collect. In the case of taxpayers residing inside of the country this usually means their monthly income will be multiplied by 120 months or less. Because the CSED is tolled while taxpayers are overseas, the IRM directs IRS Offer Examiners to multiply the taxpayer’s monthly ability to pay by 16 years, or 192 months. That means that a taxpayer residing outside of the United States will generally have a harder time qualifying for offer consideration than a taxpayer with an identical ability to pay but residing inside of the United States.
The IRS Has No Standard Expense Allowance for Taxpayers Abroad:A fundamental aspect of resolving most tax liabilities is completing a Collection Information Statement (CIS), typically on a Form 433-A or 433-F. The CIS is a financial disclosure form submitted to the IRS, which is then reviewed by the IRS and used to determine what the IRS believes a taxpayer can pay based on IRS collection guidelines. The CIS provides a number of allowable expense categories (housing and utilities expenses, vehicle ownership expenses, etc.) for which they’ve provided standard allowance amounts based on a taxpayer’s location in the country. Some standards are uniform nationally.
Generally speaking, the IRS will allow the taxpayer the amount they spend in that monthly expense category up to the IRS allowable amount. However, these Allowable Living Expense standards don’t apply to taxpayers living overseas. This can be a double-edged sword, but in general, the lack of ALE standards can be leveraged to your advantage. §5.15.1.18 of the IRM provides, “The ALE standards are not available for international taxpayers… In the absence of standardized figures for foreign countries, a fair and consistent approach should be applied to what is allowed as living expenses for international taxpayers. Collection employees should not use any other non-ALE figures as pre-determined guideline figures or arbitrarily select any location in the United States as a starting point for allowances. In those cases where there are no ALE standards or leverage to enforce collection of a balance due, the taxpayers’ submission of living expenses should generally be accepted, provided they appear reasonable.”
The lack of standard expense allowances can be to your advantage. While most IRS collection employees will refuse to consider monthly expenses in excess of the standard allowances for taxpayers living in the United States, it is not appropriate for them to do so with international taxpayers. The lack of standard allowances gives you or or your representative much broader latitude to argue that your expenses are reasonable, given the cost of living and cultural practices in your country of residence. Effectively advocating for expenses to be allowed in full, bolstered by data supporting the notion that the expenses are reasonable in your country of residence, can make a world of difference in the IRS’s determination as to your monthly ability to pay.
That being said, many frontline IRS employees may not work many international resolution matters, and may be unfamiliar with the guidance that the standards should not apply. Do not be surprised if the first IRS collections employee that you negotiate with refuses to allow your claimed expenses, especially when those expenses exceed US standard expense allowance. While most collections employees can be directed to the IRM and coaxed into allowing your expenses in full, if reasonable, you may need to elevate the case to IRS Appeals in order to succeed. IRS Appeals employees are generally more familiar with resolving atypical situations, and are often more flexible in their determinations in the interest of getting a collection alternative formally established.
No Direct Debit Installment Agreements from Foreign Bank Accounts:
A number of options for installment agreements require that the agreement be established as a Direct Debit Installment Agreement (or otherwise provide benefits for doing so), whereby a taxpayer agrees to allow the IRS to directly deduct their monthly payment each month. In order for the IRS to establish a DDIA, the debits must come from a US checking account. This can complicate things for US taxpayers that live abroad and do not maintain an US checking account.
IRS Mail Communications can be Delayed or Undeliverable:
A further source of complication when attempting to resolve delinquent tax liabilities abroad is the fact that the IRS still communicates primarily through mailed correspondence. Depending on where you live, mail correspondence sent internationally by the IRS can be severely delayed, or returned as undeliverable. While many IRS notices requiring a response provide a taxpayer with extra time to respond if the taxpayer is located overseas, I’ve seen many situations where mail was received by a client well after even the extended due date to respond, while clients that I’ve had living in countries such as Nepal and Mauritius, had a hard time receiving correspondence from the IRS at all, even after repeatedly verifying their mailing address with the IRS.
When attempting to resolve tax liabilities or navigate an IRS examination of your return, meeting IRS deadlines is critical. One’s ability to comply with these deadlines can be considerably frustrated when the correspondence from the IRS is severely delayed. While it may be tempting to list a US-based address of a friend or relative on your IRS filings (as I have seen some clients do in the past), not only is this giving the IRS the incorrect impression that you’re residing in the United States (which could cause complications for things like the Foreign Earned Income Exclusion), but it can also create issues with state revenue agencies. I’ve had clients that had been domiciled in a foreign country for a number of years, but because they had filed in the past using a relative’s address, eventually the state revenue agency created state tax assessments against them, as the state believed the taxpayer was domiciled in that state and did not file a state income tax for the years in question. An added benefit of retaining a representative to work with the IRS on your behalf is that once a Power of Attorney has been filed with the IRS, the IRS should send copies of all correspondence to the representative’s address as well, ensuring you’re made aware of, and can respond to, all IRS correspondence in a timely manner.
---If you are dealing with an IRS tax liability while living overseas, please reach out to us to see what we can do to help. Our attorneys have helped scores of taxpayers living overseas resolve their liabilities with the IRS. We can advise you on the best course of action and represent your interests before the IRS to ensure that you’re placed in the best collection alternative possible given your unique circumstances.