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

Last week’s blog post, here, examined some of the weapons the Internal Revenue Service (IRS) can use to collect taxes when the uncooperative taxpayer and assets are located abroad.  Today we look at some other possible remedies.

Is There Any US Connection to Foreign Banks?

The IRS can issue a levy notice to any bank that is within the US.  Thus, if a taxpayer has an account with a foreign bank, but that bank has a branch in the US, the IRS can simply issue a levy notice to the US office. This means the IRS may possibly reach the overseas bank account.  Even without a branch in the US, the foreign bank account is not immune from seizure by the US government.

Congress gave extraordinary powers to the United States government in obtaining bank records and seeking property subject to forfeiture that is on deposit in foreign banks when the foreign bank maintains a correspondent bank account in the United States. I blogged about this development  last year.  Having a US correspondent bank account provides a foreign bank with the only means of access to the US financial system.  Without the precious US correspondent bank account (which only a bank licensed in the US can provide), a foreign bank cannot hold accounts in US dollars, make USD investments, send or receive wires in USD and so on.

Recent US laws mandate that such foreign banks must appoint a representative to accept government subpoenas for their bank records, irrespective of foreign secrecy laws and the formal international assistance process.  If the foreign bank fails to either provide the requested records or initiate proceedings to contest it, then the domestic financial institution must terminate its correspondent relationship with that foreign bank.  It should be obvious that foreign banks will not risk losing the US correspondent bank account. Failure to terminate the correspondent relationship makes the US financial institution liable for a civil penalty of up to $25,000 per day until the relationship is terminated.  US banks won’t risk that penalty.

Furthermore, US laws now permit the forfeiture of funds that are being held in a correspondent account in the United States on behalf of a foreign bank. Funds on deposit in a bank account in the United States can now be substituted for the funds in a targeted foreign account. In other words, if the government can show that forfeitable property was deposited into an account at the foreign bank, a civil forfeiture action can now be filed against an equivalent amount of money that is in a foreign bank’s correspondent account located in the United States.

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 benefitting 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 Changing 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 evidenced a willingness to be on the OECD’s so-called “white list” with regard to tax transparency.  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.  We also see how many countries have agreed to comply with the “Foreign Account Tax Compliance Act” (FATCA) and the “Common Reporting Standard” (CRS, sometimes referred to as “GATCA”). FATCA deals only with the USA, as compared to CRS which deals with countries all over the world.

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.

US Passport Can be Revoked for Delinquent Tax Debt

Last but not least, a taxpayer’s US passport can be denied renewal and even revoked, if the taxpayer has so-called “seriously delinquent tax debt” per IRC Section 7345.  I have blogged about this before – here, here and here. Generally, a “seriously delinquent tax debt” is an individual’s unpaid, legally enforceable federal tax debt (including interest and penalties) that totals more than US$55,000 (this figure is adjusted yearly for inflation).

The State Department works with the IRS to enforce these rules.  The IRS has a detailed information page explaining the process and the rules.

Most likely, the taxpayer with assets abroad who is not cooperating with the IRS has another passport and citizenship. He may have already given up US citizenship or if not, he would not be overly concerned about being unable to use the US passport.  Doubtful he plans to visit America any day soon!

Posted November 24, 2022

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