Foreign Assets — How Can the IRS Enforce Tax Collection Overseas? (Part I)

Generally speaking, it is not an easy process for the US government to seize assets overseas in order to satisfy a taxpayer’s tax debts.  The Internal Revenue Service (IRS) has to follow certain procedures to collect taxes.  If they are assessed against a US or non-US taxpayer, assuming the person is overseas and has no US assets, the process becomes complicated.  Today’s post looks at the enforcement weapons IRS has in its arsenal to make good on tax collection through seizure of foreign assets.

Once an assessment has been issued, procedural mandates require that  the IRS  give the taxpayer notice of the assessed amount and demand payment. If the taxpayer fails to pay the assessed amount after such notice and 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.

Before making an international seizure, the IRS must determine the extent of the cooperation that can be expected from the country where the subject assets are located. A request for information or assistance from a foreign country has to be submitted and this will involve various US government offices: The Assistant United States Attorney (AUSA) assigned to the investigation should contact the Department of Justice, Office of International Affairs (OIA) and the Department of Justice, Asset Forfeiture Money Laundering Section (AFMLS).  International seizure and/or forfeiture actions must be first approved, and then coordinated, by OIA. The exception to this would be situations when the taxpayer cooperates with the government and voluntarily repatriates the asset that is located abroad.  The Internal Revenue Manual International Seizures and Forfeitures Ch. 9.7.10 sets out the procedures.

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 numerous 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 65+ 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, including possible exemptions for citizens of the treaty country.  Some other 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.

Mutual Legal Assistance Treaty

A Mutual Legal Assistance Treaty (MLAT) specifies the mutual forfeiture assistance that the countries which signed the agreement will provide to each other. The US has negotiated MLATs with numerous countries; the list is here.   All of the existing MLATs contain provisions for providing records and for “freezing” and/or seizing assets.  See, for example the MLAT between the US and Japan at Articles 1(7) and 16(1) and (2).

Even in the absence of a treaty or MLAT the IRS has strong collection powers.  Next week’s blog post will examine some of those.

Posted November 17, 2022

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