Those who have unpaid taxes owed to the IRS may have assets located in foreign countries. If the IRS cannot collect from assets located in the United States, it may seek to collect from foreign assets. This is often a very difficult task.
While the IRS has a number of tools to collect from foreign assets, all of the tools are often limited. The IRS’s recent PTMA 2022-06 guidance addresses various questions about how and when the IRS can use each of these tools. As can be gleaned from the questions the IRS is asking and answering in the guidance, the tools for international collections are often severely limited in their scope and reach.
About the IRS’s International Collection Function
The IRS is organized by function. One of the primary functions is collections. This is the part of the IRS that is tasked with collecting unpaid tax balances.
The focus is not on making sure that the tax liability is correct. The focus is on collecting. This function has a few other tasks, such as securing tax returns that have not been filed and dealing with certain penalties, but this is not the main focus of collections.
The collection function is made up of a number of subgroups. One subgroup is made of employees who work at the IRS Service Centers. These employees carry out collections by distance, such as issuing tax liens, tax levies, etc. Another subgroup is made up of employees, mostly Revenue Officers, who are based in various IRS offices throughout the country that work in the field. There are also a few specialty groups that handle more nuanced or focused collection tasks.
International revenue officers are one such specialty group. International revenue officers focus on working with U.S. taxpayers who have foreign addresses. These officers may be brought in to assist with collecting assets located outside of the United States even though the taxpayer has a U.S. address. In these cases, the domestic collections group would handle and work the collection case but has the option or ability to ask the international revenue officer for assistance. This focus on the address of the taxpayer means that most international collections cases are actually worked by the domestic collections group.
Collection Tools Available to Collect on Foreign Assets
This brings us back to the IRS guidance that is the subject of this article. The guidance is issued by the IRS Office of Chief Counsel, i.e., the IRS’s attorneys, to the IRS’s international revenue officer team.
The guidance starts by listing the collection tools that are available to the IRS to collect on foreign assets. The list includes the following:
a. Input of a Treasury Enforcement Communications System (TECS) Lookout Indicator
b. Initiation of an outbound Mutual Collection Assistance Request (MCAR) to a treaty partner
c. Levy on a domestic branch of a foreign bank
d. Suit to repatriate
e. Issuance of Letter 6152, Notice of Intent to Request U.S. Department of State Revoke Your Passport
f. Referral to U.S. Dept. of State (DOS) for passport revocation after Letter 6152 issuance
While not included in this list, the IRS can also request a Customs Order or Prevent Departure Order.
Of these tools, only b, c, and d are direct efforts to collect foreign assets. The other tools merely encourage taxpayers with foreign assets to pay their taxes.
Levy on Foreign Bank
The IRS generally cannot levy on a foreign bank account. But it can levy on a domestic branch of a foreign bank. The rules for this type of levy can be found in 26 C.F.R. 301.6332–1(a)(2).
For taxpayers with foreign bank accounts, this is the most common way that the IRS collects unpaid taxes. It is most common as it is easier than the other tools set out in b and d, above. This type of levy is really no different than a domestic levy. It consists of a form letter that is faxed or mailed to the U.S. bank branch. The bank has to then decide whether it will comply with the levy or not.
Mutual Collection Assistance Request
The MCAR is not as common. This abbreviation refers to the treaty process whereby the IRS can ask a treaty partner to use foreign tax collection laws to collect for the IRS.
This is only an option for treaty countries. There are not very many countries that have tax treaties with the United States.
Suit to Repatriate
A suit to repatriate is just a lawsuit filed by the Federal government in U.S. District Court seeking a Repatriation Order. This is an Order that commands the taxpayer to bring assets back into the United States (it may be filed along with a Writ Ne Exeat Republica, which generally prohibits the taxpayer from leaving the United States).
The IRS uses this tool when it believes there are movable or liquid assets that can be brought back into the United States. The repatriated assets are typically paid over to the court and, failure to do so can lead to a contempt charge and jail time. It should be noted that this tool is not available if the court cannot obtain personal jurisdiction over the taxpayer by service of process, etc.
The IRS has focused on developing international capabilities, but it has a long way to go. The current processes are often insufficient for collecting from those who owe back taxes to the IRS and do not want to pay over their foreign assets.