IRS Tools To Seize Foreign Assets

Variety of tax forms for filing calculations

getty

The process for IRS to seize foreign assets to satisfy tax debts is not simple. IRS use of the so-called John Doe summons is often a first step to identify possible tax evasion with offshore assets, as noted in the recent case involving Trident Trust. After resolution of the tax matter, the IRS is faced with collection of tax and penalties that are due and it may come as no surprise in many cases that the taxpayer is abroad and not willing to pay.

When the IRS targets taxpayers with assets abroad—whether they are U.S. citizens or not—the collection challenge escalates. The agency must maneuver a complex web of international laws and procedures, making the process anything but straightforward. Given the complexity and resources required to pursue tax debts internationally, the IRS is likely to focus its efforts on cases involving significant dollar amounts. Only substantial tax liabilities are typically targeted for enforcement actions abroad, ensuring that the effort and expense involved in recovering these assets are justified by the amount at stake.

The Process: IRS Weapons To Seize Foreign Assets

When the IRS issues a tax assessment, it triggers a series of procedural steps. If the taxpayer refuses or is unable to pay after notification and demand, a federal tax lien is placed on their property, including assets located in foreign countries. The IRS doesn’t have automatic authority to directly seize foreign assets. The Internal Revenue Manual International Seizures and Forfeitures Ch. 9.7.10 sets out the procedures involved in international asset seizure.

The first step is to determine how cooperative the foreign country will be. This involves engaging various U.S. government offices, including the Department of Justice’s Office of International Affairs and the Asset Forfeiture and Money Laundering Section. Coordination and approval from these governmental divisions are essential, and without their green light, the IRS cannot proceed with seizing assets abroad. These complications can be averted if the taxpayer voluntarily repatriates the foreign assets, usually done as part of a plea agreement.

Treaty Networks Help IRS Seize Foreign Assets

A key tool for the IRS in collection efforts is tax treaties. While the U.S. has numerous bilateral income tax treaties in place, only a handful contain provisions for assisting in tax collection (Canada, Denmark, France, the Netherlands, and Sweden). Even these agreements, however, come with ambiguities that can complicate enforcement.

In addition to tax treaties, the IRS can also leverage Mutual Legal Assistance Treaties. MLATs outline the forfeiture assistance that signatory countries will provide each other. These agreements often include provisions for freezing or seizing assets, offering another pathway for the IRS to reach assets held overseas.

A recent example of international tax collection cooperation is the case of J.E. Ryckman v. Commissioner, 163 T.C. No. 3 (U.S. Tax Court, August 1, 2024). Here, the IRS enforced a Canadian tax liability against Mr. Ryckman, a U.S. resident, under the mutual assistance provisions of the Canada-U.S. tax treaty. Mr. Ryckman faced a federal tax lien in the United States for unpaid Canadian taxes from the early 1990s. When challenged, the U.S. Tax Court upheld the IRS action, highlighting that under the treaty, once a tax claim is accepted for collection assistance, it is treated as “finally determined.” This effectively limited Mr. Ryckman’s ability to contest the collection in the U.S., underscoring the potency of international agreements in facilitating cross-border tax enforcement.

Other Possibilities – Foreign Banks With U.S. Connections, Foreign Courts, Passport Revocation

Even without treaties or MLATs, the IRS has other collection powers at its disposal. For instance, if a taxpayer’s foreign bank has a branch in the U.S., the IRS can issue a levy notice to that U.S. branch.

In addition, under current U.S. laws, the government has the authority to seize funds held in a U.S.-based correspondent account on behalf of a foreign bank. A correspondent account is a type of banking arrangement where a foreign bank maintains an account with a U.S. bank to facilitate transactions, such as currency exchange or wire transfers, within the U.S. financial system. This setup allows the foreign bank to access U.S. dollars and conduct business in the U.S. without having a physical branch there. Correspondent accounts are critical to foreign banks and permit access to the U.S. financial market.

The law operates by redefining the “owner” of the funds to be the account holder at the foreign bank, thus permitting seizure. The IRS must prove that forfeitable assets were deposited in a foreign bank account and once proven, it can initiate a civil forfeiture action against an equivalent sum of money held in that foreign bank’s correspondent account in the United States. Essentially, the U.S. government can substitute the targeted foreign funds with those in the corresponding U.S. account, making it increasingly difficult for taxpayers to shield assets by moving them offshore. This is a controversial enforcement mechanism, however, since it could involve consequences with the affected foreign government and it is not often pursued.

When treaties and direct administrative actions fall short, the IRS may resort to judicial remedies. Foreign courts, however, are often reluctant to enforce tax judgments from other countries. This is so because such actions touch on sensitive issues such as national sovereignty and economic policy.

If the taxpayer is a U.S. citizen with “seriously delinquent” tax debt, working with the State Department IRS can take action to have the U.S. passport denied or revoked. The IRS can pursue multiple collection activities at the same time, bringing enormous pressure to bear on the taxpayer.

Still A Long Way To Go

While current collection methods for assets overseas have a long way to go, the trend toward globalization is very gradually changing the tax collection landscape. As economic systems around the world become more interconnected, and as countries increasingly adhere to international standards of tax transparency, the barriers to cross-border tax enforcement are slowly beginning to erode. The widespread adoption of initiatives such as the U.S. Foreign Account Tax Compliance Act, and the global Common Reporting Standard are all signs that international tax collection is poised to become easier in the years ahead. As countries continue to collaborate on tax enforcement and information sharing, it’s likely that the IRS’ ability to collect on overseas assets will only strengthen, making it increasingly more difficult for delinquent taxpayers to hide behind international borders.

I help with tax matters around the globe.

Reach me at vljeker@us-taxes.org

Visit my US tax blog www.us-tax.org It is an invaluable guide in all areas of U.S. international tax, including updates about how the IRS seizes foreign assets. My blog will help you stay on top of U.S. international tax and legislative developments, keeping you ahead of U.S. tax changes impacting your life, family or business.

Send a note about an area of tax you’d like to see me write about.

_{Images are for reference only.Images and contents gathered automatic from google or 3rd party sources.All rights on the images and contents are with their legal original owners.}