The IRS Can Enforce Collection of Your Foreign Assets Abroad

The IRS Can Enforce Collection of Foreign Assets Worldwide

IRS Can Enforce Foreign Asset Collection Overseas

Out of Sight, Out of Mind is a common theme for US taxpayers who believe if they simply move their asses offshore, then the assets will become out of reach for the US government to collect on a tax or penalty debt –– but unfortunately, that is incorrect. The United States has entered into many different types of international agreements with foreign countries, such as double tax treaties, FATCA Agreements, Extradition Agreements, and more. In other words, just because a US person may have moved their assets overseas does not mean that the IRS is unable to seek collection of foreign assets in order to resolve US delinquencies. While it is not every day that the US government goes after foreign assets (or the US Person directly) to resolve US taxes and penalties, it is important for taxpayers to be aware that the IRS can use these tools.  Let’s look at a few ways the IRS and other government agencies can seek to collect foreign assets in order to resolve US tax and penalty liabilities,

Issue a Levy on a US Branch of the FFI

It is not uncommon for foreign financial institutions to have branches or subsidiaries in the United States. Depending on how the relationship is between the United States and the Foreign Financial Institution, oftentimes the IRS has the ability to seek a levy on the US domestic branch of a foreign financial institution.

This is laid out in the internal revenue Manuel chapter 5 as follows:

5.21.3.2 Levy on a Domestic Branch of a Financial Institution

• • • There are instances where funds held offshore can be reached by a levy if the bank has a branch in the U.S. or in a territory of the U.S.

    • Treasury Regulations Section 26 C.F.R. 301.6332–1(a)(2) outlines the procedures for levy when a bank is in business in the U.S. with deposits held in a branch outside the United States. The regulations provide two different sets of procedures with regard to a levy on bank deposits held in offices outside the United States depending on whether or not the taxpayer is or is not within the jurisdiction of the U.S. court at the time the levy is made.

      • If the taxpayer is within the jurisdiction of a U.S. court at the time the levy is made, then

        • : The notice of levy must specify that the Area Director intends to reach such deposits, and
        • That the bank is in possession of (or obligated with respect to) such deposits in an office outside the United States or a territory of the United States.

      • If the taxpayer is not within the jurisdiction of the U.S. court at the time the levy is made, then:

        • The notice of levy must specify that the Area Director intends to reach such deposits,

        • That the bank is in possession of (or obligated with respect to) such deposits in an office outside the United States or a territory of the United States, and

        • That such deposits consist, in whole or in part, of funds transferred from the United States or a territory of the United States in order to hinder or delay collection of the tax imposed by the Code.

5.21.3.3 Writ Ne Exeat Republica

This is a specific type of writ in which the IRS can seek to prevent taxpayers from leaving a jurisdiction in order to secure the payment of debts and liabilities. It is referred to as a Writ Ne Exeat Republica — and it is usually filed in accordance with other documents seeking to close a lien or execute a levy. One example of how this type of scenario can play out is in the case of Charles and Kathleen Barrett. In this situation, taxpayers were prevented from flying out of the United States and back to Ecuador because this type of writ was already issued.

As provided by the IRM on how the IRS may pursue a Writ Ne Exeat Republica:

• • • Writ Ne Exeat Republica is an action authorized by IRC §7402(a). Writ Ne Exeat Republica is the appropriate suit action when the taxpayer:

      • Is about to leave the U.S. and is unlikely to return to the U.S., or

      • Has left the United States but is likely to return and may be subject to detention by the writ, and

      • Has conveyed or concealed cash or other property so that it may be taken out of the U.S

    • A Writ Ne Exeat Republica is an action against a person, not property. It is a temporary remedy, and not intended to operate as a perpetual restriction upon a taxpayer’s freedom of movement.

    • Writ Ne Exeat Republica is usually filed in conjunction with some other civil action against the taxpayer such as a Suit to Foreclose the Federal Tax Lien, a Repatriation Order, or a Summons Enforcement. The purpose of a Writ Ne Exeat is to preserve the court’s power to provide a means of protecting the government’s ability to collect the tax by another means. The revenue officer will have to show that the other civil action they propose will not be enforceable unless the defendant is prevented from removing himself or his assets from the country.

    • Consider these factors when determining whether or not to file a Writ Ne Exeat Republica:

      • Taxpayer has a large valid tax liability,

      • Taxpayer has transferred, or is in the process of transferring, substantially all of his assets to a location outside the United States,

      • Distrainable domestic property and other property reachable without the writ are insufficient to satisfy the tax liability,

      • Other proposed civil action will not be enforceable unless the taxpayer is prevented from removing themselves or their assets from the United States,

      • Taxpayer established residency outside the United States or intends to do so,

      • Taxpayer’s assets cannot be reached absent the issuance of the writ.

5.21.3.4 Customs Order or Prevent Departure Order

Customs Order or Prevent Departure Order is similar to the above-referenced writ — although it is important to note that this type of order is only issued to non-US citizens, preventing them from exiting the United States. In other words, if a person is considered a US citizen then this type of order would not be available. The idea behind the customs order or prevent departure order is to ensure that a foreign person who has an outstanding significant US tax debt/liability is unable to leave the jurisdiction until they have sufficiently resolved the matter.

As provided by the IRM:

• • • A Customs Order or Prevent Departure Order is an administrative action similar to the Writ Ne Exeat Republica. A Customs Order can prevent a non-U.S. Citizen from exiting the United States, pending the resolution of a collection matter.

    • The authority for a Customs Order is found in 22 C.F.R. §46.2(a) which states in part “…No alien shall depart, or attempt to depart, from the United States if his departure would be prejudicial to the interest of the United States under the provisions of 46.3.” In addition, C.F.R. §46.3(h) applies to a collection investigation where it states, in part, “Any alien who is needed in the United States in connection with any investigation or proceeding being, or soon to be, conducted by any official executive, legislative, or judicial agency in the United States or by any governmental committee, board, bureau, commission, or body in the United States, whether national, state, or local.”

    • Coordinate with Area Counsel before requesting a Customs Order or Prevent Departure Order. Area Counsel will coordinate as necessary with the Office of Associate Chief Counsel (International).

    • Request the TECS coordinator to input a Customs Order into TECS.

      • Note: Close coordination must be maintained between the TECS coordinator and the revenue officer as the TECS coordinator may need to provide instructions to the Department of Homeland Security if the taxpayer is prevented from leaving the country.

      • Note: See IRM 5.1.18.14, Treasury Enforcement Communications System, for instructions on placing a taxpayer on TECS. If the alien is found attempting to exit the U.S., they will be detained and the revenue officer will be notified and requested to provide instructions to the Customs officer.

5.21.3.6 Suit to Repatriate Property – Repatriation Orders

Another type of (court) order that can be issued is referred to as a repatriation order. This type of order is handled by a Federal Judge after a hearing and it can require a taxpayer who may have already transferred assets out of the United States into a foreign country to have to transfer them back to the United States. This was recently a key issue in a highly contested FBAR case, in which the court issued a repatriation order to satisfy an eight-figure FBAR penalty.

As provided by the IRM:

• • • A Repatriation Order is an order issued by a federal judge, after a hearing, requiring a taxpayer who has either transferred assets from the U.S. to a foreign country or acquired assets in a foreign country to transfer them back into the United States.

    • A Repatriation Order must show:

      • An outstanding tax liability,

      • A reasonable basis that the taxpayer has assets outside the U.S.,

      • Levy on domestic assets is not sufficient to satisfy the tax liability, and

      • The U.S. is able to get personal jurisdiction over the taxpayer.

    • The revenue officer must show that the taxpayer is either in the U.S. or a U.S. Territory or the likelihood that the taxpayer will be returning to, or passing through, the United States.

    • Before recommending a suit seeking a Repatriation Order:

      • Exhaust meaningful enforcement against domestic property.

      • Determine the nature, value and location of the foreign property.

      • Consider making an Exchange of Information (EOI) request to a foreign country pursuant to a U.S. tax treaty or tax information exchange agreement (TIEA), to confirm the existence and value of property located in that country. See IRM 5.21.2.2, Exchange of Information, for additional information. Under no circumstances should contact be made with a foreign tax authority without going through the office of the U.S. Competent Authority. The IRS can also obtain information from a U.S. territory tax department under exchange of information provisions contained in a U.S. territory tax coordination agreement. See IRM 5.21.2.2.3, Exchange of Information – U.S. Territories, for additional information.

      • Document this information in the case file.

      • Serve a levy on the domestic bank branch if the property is held in a foreign banking institution with a United States branch. Enforce the levy as needed.

      • Check to see if the United States has entered an income tax treaty with a foreign country that contains comprehensive mutual collection provisions (a Mutual Collection Assistance Request or MCAR). If the U.S. has an MCAR arrangement with the applicable country, make an MCAR request rather than seeking a repatriation order. See IRM 5.21.7.4, Mutual Collection Assistance Requests (MCAR), for additional information on the MCAR program. Under no circumstances should contact be made with a foreign tax authority without going through the office of the U.S. Competent Authority

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.