Title: Cross-Border Asset Seizures: The IRS's Arsenal for Recovering Overseas Wealth
Seizing foreign assets to fulfill tax debt obligations isn't a simple process for the IRS. Initiating investigations into potential tax evasion involving offshore assets is often the first step, as demonstrated in the Trident Trust case. However, resolving the tax issue often reveals a familiar pattern: the taxpayer is overseas and unwilling to pay.
When the IRS targets non-compliant taxpayers with foreign assets, collection becomes more complicated. The IRS must navigate a web of international laws and procedures, transforming an already challenging task into a complex endeavor. The agency usually focuses its efforts on significant tax liabilities, ensuring that the resources required to recover the assets justify the effort.
The seizing of foreign assets is a multi-step procedure. Upon tax assessment, if the taxpayer refuses or is unable to pay, a federal tax lien is placed on their property, including assets abroad. Directly seizing foreign assets is not within the IRS's immediate authority. For international asset seizures, the Internal Revenue Manual (IRM) Ch. 9.7.10 spells out the procedures.
The first step in the process is assessing the foreign country's cooperativeness. This entails engaging various U.S. government offices, such as the Department of Justice’s Office of International Affairs and the Asset Forfeiture and Money Laundering Section. Cooperation and approval from these divisions are essential, as failure to acquire their green light could hinder asset seizure attempts. In such instances, taxpayers may opt to voluntarily repatriate their foreign assets, often as part of a plea agreement.
Tax treaties serve as a valuable tool for the IRS during collection pursuits. While the U.S. has numerous bilateral income tax treaties, only a handful include provisions for tax collection assistance. Beyond tax treaties, the IRS can also leverage Mutual Legal Assistance Treaties (MLATs), which outline asset forfeiture assistance between signatory countries. These agreements often include provisions for freezing or seizing assets, offering an alternative path for the IRS to recover offshore assets.
One of the most recent examples of international tax collection cooperation is the J.E. Ryckman v. Commissioner case. The IRS enforced a Canadian tax liability against Mr. Ryckman, a U.S. resident, under mutual assistance provisions from the Canada-U.S. tax treaty. The U.S. Tax Court upheld the IRS action, underscoring the treaty's power in facilitating cross-border tax enforcement.
Even without treaties or MLATs, the IRS has alternatives at its disposal. If a taxpayer's foreign bank has a U.S. branch, for instance, the IRS can issue a levy notice to the U.S. branch. Additionally, the government can seize funds held in U.S.-based correspondent accounts of foreign banks. This setup allows foreign banks to access the U.S. financial market, and if targeted assets are discovered in these accounts, the IRS can initiate a civil forfeiture action.
When treaties and direct administrative actions fail, the IRS may resort to judicial remedies. Foreign courts are often reluctant to enforce tax judgments from other countries, as this potentially infringes on national sovereignty. However, if the taxpayer is a U.S. citizen with "seriously delinquent" tax debt, the IRS can take action to have their U.S. passport denied or revoked.
In the larger scheme, current methods for seizing overseas assets have room for improvement. Globalization's gradual erosion of international tax collection barriers is a promising trend. With the widespread adoption of initiatives like the U.S. Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard, it seems that international tax collection could become easier in the coming years. As countries like the U.S. and its partners work to strengthen tax enforcement, the IRS's ability to collect on overseas assets will likely grow stronger, making it increasingly challenging to hide assets behind international borders.
[1] OECD website, "FATCA," last accessed October 2022.[2] The U.S. Department of the Treasury, "Income Tax Treaties," last accessed October 2022.[3] OECD website, "Global Minimum Tax and Preventing Double Taxation," last accessed October 2022.[4] IRS website, "Voluntary Disclosure Programs," last accessed October 2022.[5] U.S. Department of State, "Mutual Legal Assistance Treaties," last accessed October 2022.
The IRS can utilize voluntary disclosure programs to encourage taxpayers with foreign assets to come forward and settle their tax debts, as outlined in the IRS's Voluntary Disclosure Programs. Cross-border tax collection becomes smoother when tax treaties and Mutual Legal Assistance Treaties (MLATs) are in place, as they provide legal frameworks for asset seizure and collection. For example, the J.E. Ryckman v. Commissioner case illustrates the use of mutual assistance provisions from the Canada-U.S. tax treaty to enforce a Canadian tax liability against a U.S. resident. The U.S. IRS also targets foreign banks with U.S. branches, issuing levy notices to recover taxpayers' unpaid tax debt.
