Enforcement: Collecting United States Taxes Abroad
It is difficult for the IRS to collect taxes if they are assessed against a US/non-US taxpayer assuming the person is overseas and has no US assets. Once an assessment has been issued, procedural mandates require that the IRS give the taxpayer notice of the assessed amount and demand payment within 60 days. If the taxpayer fails to pay the assessed amount after such demand, a so-called federal tax lien arises which attaches to the taxpayer’s property wherever situated, including property located in a foreign jurisdiction. The IRS has no express statutory authority to take administrative collection action against such foreign-situs property.
Using Tax Treaties
If a tax treaty is in place between the US and the foreign jurisdiction where the taxpayer has assets, it may contain a collection assistance provision. The United States has 64 bilateral income tax treaties currently in force. Only a small percentage of tax treaties negotiated with the US currently contain a collection assistance provision, although this may change as the US and other countries have clearly evidenced a strong desire to join forces in efforts to crack down harder on tax evasion. Of the 64 income tax treaties the US has negotiated, only 5 of them have expanded collection provisions — Canada, Denmark, France, Netherlands, and Sweden. Even though these treaties contain somewhat robust collection assistance provisions, there are many ambiguities and uncertainties as to their parameters. Twenty-four bilateral income tax treaties have a limited tax assistance collection provision, but these are so ambiguous that commentators have noted they probably have very limited use.
Judicial Collection Remedies
In the absence of treaty assistance, the IRS must pursue judicial collection remedies in order to collect taxes owing. Judicial efforts to collect US taxes by levying on the assets of a US or non-US taxpayer when assets are located in the US is generally not very difficult. This is not that case, however, when a US or non-US taxpayer has assets located outside the United States. The issue becomes even more complex when the IRS attempts to collect assessed taxes through a foreign court, regardless of whether the taxpayer’s obligation is first reduced to a judgment in a US court. As a general matter, the courts in one country are not very willing to collect taxes benefiting the sovereign of another country since this concerns the revenue matters of that country. Enforcement efforts in this area could inevitably lead to policy issues and questions about the legitimacy of the financial and tax policies of that country. Historically, these were areas in which other sovereigns did not wish to tread, predominantly due to the diversity among various economic systems.
Globalization Trend May Change the Game
The trend toward globalization, however, foreshadows that this will change as differences among the world’s economic systems continue to diminish. This is indeed reflected in the spate of countries that recently evidenced a willingness to be on the OECD’s so-called “white list” with regard to tax transparency following the London summit of G20 leaders. Inclusion on the “white list” generally means a country will be in compliance with international standards of tax information exchange. The world’s biggest economies warned that noncompliance would result in harsh action being taken against those that did not cooperate.
With increased transparency and information exchange among nations, it is not difficult to imagine that tax collection enforcement efforts will become easier despite international boundaries.