I received a panicked call from a client recently, being detained at a major metropolitan airport. The client, a nonresident United States taxpayer, owed money to the IRS. Upon investigation, I learned who was responsible for detaining him: none other than the IRS. Under what authority? A two-year-old program designed to target nonresident delinquent taxpayers who travel to and from the United States.
New York tax practitioners can soon expect to receive similar calls. Dubbed the “contact program,” it has a clear objective: to improve tax administration and compliance among nonresident U.S. taxpayers. In what ways?
(1) By collecting delinquent taxes;
(2) By securing delinquent returns; and
(3) By identifying cases with criminal potential for referral to Criminal Investigations (“CI”).
To accomplish this objective, the IRS and the Department of Justice have teamed up. I know what’s running through your mind right about now: “nothing good comes when these agencies team up, especially for delinquent taxpayers.”
What has brought these two agencies together is the recognition that the only way to enforce the tax obligations of nonresident delinquent taxpayers is by combining the full panoply of tools and procedures – both administrative and judicial – that are at their disposal. The purpose of this article is to introduce the tools and procedures that the IRS is now using to collect taxes owed by non-resident delinquent taxpayers.
Administrative Remedies
Existing administrative procedures authorize the IRS to collect taxes in the following ways:
(1) Offsetting tax refunds and government benefits: The IRS can offset both current and future federal benefits, such as social security. There is no statute of limitations for the collection of debts. Thus, the offset will proceed until the penalty is paid in full.
(2) Levying financial institutions: The IRS can levy on the assets of a taxpayer that are held in a foreign bank so long as the foreign bank has branches in the United States. Similarly, the IRS can levy on a taxpayer’s wages from a foreign corporation so long as the foreign corporation has branches in the United States.
(3) Requesting assistance under a tax treaty: The IRS can seize property in any country that the United States has a treaty with so long as the treaty contains a Mutual Collection Assistance Requests Clause (MCAR). What does this mean? Very simply that anyone living in a country that has an MCAR with the U.S. might as well be living in the United States. Why? Because the person’s assets could be seized just as easily as if he or she was living in the United States. Currently, there are five such countries. The treaty partners and types of taxes that can be collected include the following:
a. Canada: All taxes.
b. France: Income; estate and gift; wealth and other specified taxes.
c. Denmark: Income and other specified taxes.
d. Sweden: Income and other specified taxes.
e. Netherlands: Income and other specified taxes.
(4) Garnishing wages: The IRS can also garnish the wages of nonresident taxpayers in most countries with which the U.S. has an MCAR.
Now detaining delinquent taxpayers at the border can be added to the list. The purpose is simple: to prevent any non-U.S. person who has an unresolved collection issue with the IRS from either entering or leaving the United States.
To assist Revenue Officers in locating the assets (and levy sources) of nonresident delinquent taxpayers outside of the United States, the Service has taken a big step. That step consists of granting its Revenue Officers access to the Treasury Enforcement and Communication System, or TECS for short.
What is TECS? It is a computer system that contains a number of proprietary government databases. TECS gives the Revenue Officer access – on demand – to the following government databases: (1) Federal, national, state, and local law enforcement agencies; (2) the FBI’s National Crime Information Center (NCIC), Financial Intelligence Branch (FIB); and (3) the National Law Enforcement Telecommunication Systems (NLETS). Obviously, this information is a powerful weapon in the IRS’s criminal arsenal. Indeed, it gives a new meaning to the phrase, “Uncle Sam is watching you!”
As if this newly expanded access was not enough, the Service also has access to recent passport applications filed by U.S. citizens.
Let’s turn to the procedure behind how a Revenue Officer might detain a delinquent nonresident taxpayer at the border. The Revenue Officer must request a Prevent Departure Order. A U.S. Immigration and Customer Enforcement (ICE) Departure Control Order or a “Prevent Departure Order” is nothing more than an administrative action. Who, you may ask, will execute this customs hold? None other than ICE.
Under what circumstances might the IRS request an Order? When it has reason to believe that a “high net worth delinquent taxpayer” with a residence outside of the U.S. is traveling either into or out of the United States. The customs hold will prevent such a taxpayer from traveling internationally.
Judicial Remedies
If the U.S. succeeds in getting personal jurisdiction over the taxpayer, the IRS may file a suit seeking a court order. Such an order would direct the taxpayer to repatriate assets that were once held in the United States, but subsequently transferred to a foreign country, back to the United States in order to satisfy a tax liability. A repatriation order can only be issued by a federal judge after a hearing. In other words, the taxpayer has a procedural due process right to a hearing before a repatriation order can be issued.
If the taxpayer refuses or neglects to return the assets, he or she will be subject to contempt proceedings. Very few, if any, taxpayer have been successful in challenging these contempt charges. In fact, most have been locked up following failed appeals.
An additional remedy allowing for detention of a taxpayer in a civil case is called the “Writ Ne Exeat Republica.” Query: How come all of the heavy-handed remedies seem to have Latin roots? In any event, it is “a restraint upon the common right of movement from place to place within the United States and upon emigration.”
According to the Internal Revenue Manual, such a writ is appropriate when the taxpayer: “[1] is about to leave the U.S., [2] is unlikely to return to the U.S., and [3] has conveyed or concealed the property so that [it] may be taken out of the U.S.”
Conclusion
In order to educate its revenue officers on collecting taxes due from non-resident taxpayers, the IRS has revised its manuals. We, as tax practitioners, must keep up. That means educating ourselves so that we are fully conversant with the tools and procedures that are at the IRS’s disposal. Then, and only then, will we be able to best represent our clients. .
In accordance with Circular 230 Disclosure
As a former public defender, Michael has defended the poor, the forgotten, and the damned against a gov. that has seemingly unlimited resources to investigate and prosecute crimes. He has spent the last six years cutting his teeth on some of the most serious felony cases, obtaining favorable results for his clients. He knows what it’s like to go toe to toe with the government. In an adversarial environment that is akin to trench warfare, Michael has developed a reputation as a fearless litigator.
Michael graduated from the Thomas M. Cooley Law School. He then earned his LLM in International Tax. Michael’s unique background in tax law puts him into an elite category of criminal defense attorneys who specialize in criminal tax defense. His extensive trial experience and solid grounding in all major areas of taxation make him uniquely qualified to handle any white-collar case.
2 comments on “Home Sweet Home for International Tax Collection”
One small comment – with regard to Canada and collection of “all taxes” for the US. In fact, Canada will not collect US taxes from anyone who was a Canadian at the time the tax was incurred.
For those dual national citizens Who live outside of the United States, serious consideration for renouncing their United States citizenship is often a worthy exercise. The pros and cons need to be carefully thought through for each individual and their particular circumstances.
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