Got’cha! Delinquent Taxes Owed to IRS, Now Owed Indefinitely? What About Tax Non-Compliant Expatriates?

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It was recently reported in the press that the Social Security Administration was collecting old debts of many deceased persons by intercepting the tax refunds of their children. After much unwanted publicity, the Social Security Administration announced it would stop doing this with regard to debts that were over ten years old. What implications does this case raise for tax noncompliant expatriates?

The case of the Social Security Administration is quite alarming and raises serious concerns for persons with unpaid US tax liabilities. It is widely reported and recognized that there has been a vast increase in expatriations. I suspect that some expatriations will involve taxpayers who were not fully tax compliant and I foresee that this area is ripe for IRS audit and controversy.

Can the IRS offset Social Security payments due to the expatriate for unpaid income and other taxes? What if the tax non-compliant expatriate has US citizen children? Aside from the tax hit they will suffer upon receipt of a gift or bequest from such a “covered expatriate”, can anything else happen to them? Can the IRS take their tax refunds to satisfy old tax debts of their parents, as the Social Security Administration did just recently? Where does it all end?

Let’s learn a bit more about the Government’s ability to collect on old debts.

Unlimited Time to Collect Government Debt by Offset

Due to a change in the law, the US Government now has the ability to collect, by way of “administrative offset”, debts owed to it for an unlimited time period. Under prior law, if the debt was not collected within 10 years, the statute of limitations barred the Government from pursuing the claim. The 10 year statute of limitation has been modified by Public Law 110-246 Section 14219 to allow administrative offsets after the general 10 year expiration period has run. It has been reported that the Treasury Department has collected close to US$2 billion in intercepted tax refunds in 2014 with $75 million of that on debts that were delinquent for over 10 years.

What does this mean if you owe taxes to Uncle Sam and the tax assessment is over 10 years old? Can the IRS still collect the taxes due?

The IRS cannot levy or seize a taxpayer’s assets after the 10-year statute has run, but the IRS will be able to take future tax refunds as an administrative offset against the debt without a limitation on time period. It is unclear to me to what extent the IRS may be able to take amounts owed by another Government agency to the individual taxpayer as an offset for delinquent taxes (for example, can the IRS take social security payments owed to an individual in order to offset tax liabilities beyond the 10-year statute of limitation period?). This is apparently a complicated area. Certain Federal payments are statutorily exempt from offset. Other payments may be exempted from offset by the Secretary of the Treasury (Secretary) upon the request of the Federal agency which issues the payments. Upon the request of the head of an agency, the Secretary is required to exempt payments made under “means-tested programs,” and may exempt other classes of payments under standards prescribed by the Secretary. The standards must “give due consideration to whether administrative offset would tend to interfere substantially with or defeat the purposes of the payment certifying agency’s program.” More information on this complex topic can be found here.

Treasury Offset Program and How it Works

The offset of Federal payments is carried out through the Bureau of the Fiscal Service’s (BFS) Treasury Offset Program (TOP). Interestingly a very recent IRS tax tip, 2014-59, explains how unpaid Government debt can affect your federal tax refund. It explains that debts such as past due child support, student loan, state income tax or unemployment compensation may reduce your tax refund. BFS may use part or all of your tax refund to pay the debt. You should receive a notice if BFS offsets your refund that lists the original refund and the offset amounts. It will also include the agency that received the offset payment and its contact information. If you believe you don’t owe the debt or you want to dispute it, IRS advises that you contact the agency that received the offset and admonishes that you should not contact the IRS or BFS. For those who filed a joint tax return, if your spouse is solely responsible for the debt, you may be entitled to part or all of the refund offset. A special form (Form 8379, Injured Spouse Allocation) must be filed to claim a refund in this circumstance.


Important takeaways are: (i) there is no longer a time period after which collection is barred on a debt owed to the Government by an individual when offset is available to satisfy that debt (ii) there are complex rules concerning the type of Federal payments that can be offset for debts owed to the government and (ii) it is unclear whether the tax refund of another person can be taken in satisfaction of a related individual’s debt.

Maybe the best takeaway is to get tax compliant!

In accordance with Circular 230 Disclosure

Original Post By: Virginia La Torre Jeker, J.D.

Virginia La Torre Jeker J.D., has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has 30 years of experience specializing in US and international tax planning as well as international commercial transactions. She has been based in Dubai since 2001; prior to that time she worked in Hong Kong for 15 years as a US tax consultant for international law firms, major banks (including HSBC) international accounting firms (Deloitte) and trust companies. Early in her career she worked in New York with the top-tier international law firm, Willkie Farr & Gallagher.

Virginia is regularly asked to speak at numerous conferences and seminars for various institutes and commercial organizations; publishes a vast array of scholarly works in her area of expertise, been interviewed by CNN and is regularly quoted (or has her articles featured) in local and international publications. She was recently appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland. She was a guest lecturer at the University of Hong Kong, LL.M Program (Law Department) and served as an adjunct Business Law professor at the American University of Dubai and at the American University of Sharjah where she also taught the legal / ethical aspects of internet law and internet based transactions.


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