The United States has entered into income tax treaties with several countries that provide for the exchange of information.[i] But only “five treaties provide for assistance in collecting tax judgments against U.S. citizens living abroad.”[ii] Those are with the following countries: Canada, France, Holland, Denmark and Sweden.[iii]
Let me explain to you what I mean by “collection of tax judgments.” Specifically, I’m referring to the ability of the United States to collect tax claims against its own citizens who happen to be living in one of these five countries.[iv] Because these treaties are bilateral, the reverse is also true: partner countries may collect tax claims against their own citizens who happen to be living in the United States.[v]
To avoid any unnecessary confusion, an important distinction must be made. As expansive as this treaty may be, it does not provide a mechanism for the foreign government to collect foreign taxes owed by U.S. citizens.[vi] For example, France cannot rely on the U.S.-French Treaty to collect French taxes from a dual French-American citizen even if that person happens to live in Bordeaux, and enjoys feasting on some of the world’s most expensive and prestigious wines.
Very simply, the present treaty policy of the United States is to “disallow the collection of foreign debts or foreign tax judgments against U.S. citizens.”[vii]
How does the collection of tax judgments with countries that the U.S. has collection treaties with work? By the terms of the treaty, such claims:
“may be accepted for enforcement by the other State and collected in that state in accordance with the laws applicable to the enforcement and collection of its own taxes. The State to which application is made shall not be required to enforce executory measures for which there is no provision in the law of the State making the application.”[viii]
Consider the following example. Pierre is a dual citizen of the U.S. and Canada who presently resides in Montreal. He has fastidiously filed U.S. and Canadian tax returns for the last ten years. Following an audit of his 2012 U.S. tax return, the IRS determined that there was a $ 20,000 deficiency and mailed him a notice of deficiency. Pierre timely filed a protest but Appeals found in favor of the IRS. Having failed to file a petition with the tax court, that deficiency soon became a $ 20,000 assessment.
The IRS now seeks to collect on its claim by imposing a tax lien on real estate owned by Pierre in Canada. Essentially, what the U.S. government is attempting to do is cajole collection officials from the Canadian Revenue Agency (Agence du revenue du Canada) to do its dirty work for it: namely, to collect Pierre’s unpaid U.S. taxes by enforcing an IRS tax lien on property located within Canada.
As incredible as this might sound, reliance upon a foreign taxing authority for assistance in collecting a tax judgment against a citizen of the requesting country is entirely permissible under the terms of the U.S.-Canadian Treaty. Of course, such a request must be accompanied by documents firmly establishing that the taxes have been finally determined.[ix]
Therefore, the Canadian Revenue Agency would have no choice but to enforce the lien and to collect the unpaid taxes. But what if Pierre filed a motion in a Canadian court to have the tax lien imposed by the Canadian Revenue Agency, at the behest of the IRS, set aside? Not surprisingly, the court would refuse Pierre’s request on the grounds that the imposition of the tax lien was proper under the terms of the treaty.
Believe it or not, a similar case actually exists, but with an ironic twist: the facts are the mirror opposite to those presented in this hypothetical. There are three key differences. First, the taxpayer lived in the United States, and not in Canada. Second, it was the Canadian government, and not the U.S. government, that sought to impose a tax lien on the taxpayer’s property. And third, the property was located in the United States.
At the behest of the Canadian Revenue Agency, the IRS imposed a tax lien on property belonging to the taxpayer in New York. The taxpayer filed a motion in the federal court for the Southern District of New York to have the tax lien set aside.[x] The court refused to interfere with the tax lien, finding that it was appropriate under the terms of the U.S.-Canada treaty.[xi]
With such a modest number of partner countries that the U.S. can rely upon for bilateral assistance and support in collecting tax, does that mean that delinquent taxpayers can avoid collection altogether simply by moving themselves and their money to one of the other one hundred and ninety countries in which the U.S. has no collection treaties?
In other words, are there any tools available to international revenue officers to collect taxes from U.S. persons who have conveniently “parked themselves and their assets” beyond “the reach” of the IRS?[xii] While such tools do exist, they are few and far between.
If you think that it is as simple as the IRS filing a notice of federal tax lien with the foreign taxing authority as is typical in a domestic collections case, or using foreign courts to collect U.S. taxes, you would be sadly mistaken. These collection devices are useless when it comes to the cross-border collection of taxes.
So if the regular, run-of-the-mill domestic collection techniques are off limits, what techniques can it use? One technique that has been getting a lot of attention lately – not to mention gathering up steam – is the “Customs Hold,” in which I have firsthand experience. This consists of detaining delinquent taxpayers at the border, not unlike an ICE detainer.[xiii]
Let me share with you a story. On a weeknight not too long ago, I was just getting back from a late-night walk with Bella, my two-month old Labrador who has not slept a full night since arriving at her new home back in October (that’s a story for another day). After putting Bella in her cage, I crawled back into bed.
Just then, my cell phone started ringing (not unusual even for the late hour considering the fact that many of my clients live abroad). I picked it up. Almost immediately, I could hear heavy breathing on the other end. The caller was speaking very fast and stumbling all over his words.
I might have hung up the phone and blamed it on a “prank caller” if I didn’t recognize the voice on the other end. It was “Joe,” my client. But he was not calling for reasons you might expect. No, Joe had not just been arrested for a DWI and in dire need of legal advice (although I’ve had many such calls).
Instead, Joe was at a major metropolitan airport being detained by a Customs and Border Patrol Agent in a tiny room off in the corner. Upon investigating, I learned who was behind this: none other than the IRS. Under what authority? A two year-old program designed to prevent any U.S. person who has an unresolved collection issue with the IRS from either entering or leaving the United States.
Very simply, Joe owed Uncle Sam money and Uncle Sam wanted to collect it.
Before discussing how the program works, some background information is necessary. The program relies upon the sharing of information between two governmental agencies: the Department of Homeland Security (DHS) and the IRS.
IRS revenue officers have access to the Treasury Enforcement and Communications System, or TECS for short. TECS is a computer system that is maintained by the Department of Homeland Security (DHS) and that provides access to a number of proprietary databases, including: (1) Federal, national, state, and local law enforcement agencies; (2) the FBI’s National Crime Information Center (NCIC), Financial Intelligence Branch (FIB); and (3) the National Law Enforcement Telecommunication Systems (NLETS).
TECS is used extensively by the law enforcement community. Indeed, it gives a new meaning to the phrase, “Uncle Sam is watching you!”
How would a delinquent taxpayer like Joe get ensnared in something as thorny as this? Remarkably, the procedure for detaining such taxpayers is so simple that it could happen to virtually anyone. First, the revenue officer prepares Form 6668, TECS Entry Request, to have a Customs Hold placed on a delinquent taxpayer.[xiv] The completed form is sent to the group manager for approval, which consists of nothing more than a signature.[xv]
After signing it, the group manager emails it to the TECS Coordinator.[xvi] The TECS Coordinator adds the taxpayer’s name into TECS. Finally, DHS notifies the IRS whenever the taxpayer attempts to reenter the United States.[xvii]
Is there any procedure for notifying delinquent taxpayers of the Customs Hold? As a matter of fact, there is. Taxpayers are informed with a Letter 4106, Letter Advising Taxpayer of Department of Homeland Security Notification, that an international revenue officer has notified the DHS “that the taxpayer has outstanding tax liabilities.”[xviii]
What happens when a taxpayer whose name is in the TECS database attempts to reenter the United States? Joe’s story provides the hint. It allows for brief detainment of the person by a Customs and Border Protection Officer for the purpose of gathering his or her “contact information” (i.e., “where he will be staying while in the United States”).[xix] Nothing more. Nothing less.
In other words, while it is supposed to be a tool for collecting taxes from delinquent taxpayers, it offers no ironclad guarantee that the person being detained will actually pay the tax. And therein lies the problem. Holding individuals as they seek to return to the United States only works as a collection device if the experience itself was so emotionally traumatic as to convince them to pay. At a primitive level, it only works if it instills the fear of God in the taxpayer.
While it might potentially cause the person some alarm, it’s hard to imagine that it will have the desired effect of inspiring taxpayers to take out their checkbooks and write out a check to Uncle Sam. And before we can even get to that point, do not forget that the person has to attempt to reenter the United States. Suffice to say, it would be a cold day in hell before someone who receives Letter 4106 steps foot back in the United States again.
For those wondering what impact being detained at the airport by a border patrol agent had on poor ‘ole Joe, you may be surprised to learn that Joe did not waste any time in paying his tax bill. In fact, he mailed the check the very next day. Thus, detainment had the same effect on Joe that the IRS hopes it will have on all delinquent taxpayers.
No discussion of this program would be complete without some statistics. According to recent statistics, there are approximately 1,700 taxpayers on the TECS with approximately $ 1.6 billion in delinquent tax assessments.[xx] This includes assessments of approximately $ 1.1 billion exclusively owed by international taxpayers.[xxi] Unfortunately, there are no statistics citing how many taxpayers who are actually detained later wind up paying their tax bill.
An additional remedy allowing for detention of a taxpayer in a civil case is called the “Writ Ne Exeat Republica.” Don’t let the Latin root scare you. It is nothing more than a “labor-intensive option” that allows the IRS “to stop a taxpayer from leaving the country with their money.”[xxii] According to the Internal Revenue Manual, such a writ is appropriate when the taxpayer: “ is about to leave the U.S.,  is unlikely to return to the U.S., and  has conveyed or concealed the property so that [it] may be taken out of the U.S.”
As demonstrated above, the only collection tools that are at the IRS’s disposal – reliance on delinquent taxpayers “living in one of five countries” or “trying to catch individuals one by one as they attempt to reenter the country”[xxiii] – are woefully inadequate. Indeed, these tools pale in comparison with the rights enjoyed by those living in the twenty-first century to feely move both themselves and their assets anywhere in the world.
If the Treasury truly means what it says about repatriating money offshore back to the United States, then I agree with the position taken by Mr. Fogg in his article, “International Collection Efforts by the IRS – Expanding the Number of Treaties in which We Have Collection Language”: it must pursue collection efforts with the same vigor that it uses to track down money stashed in offshore tax havens.[xxiv]
It can begin by expanding the list of countries with which the U.S. has collection treaties beyond just five. Very simply, collection language – similar to that which already appears in the United States’ other collection treaties – must be added to pre-existing treaties and any subsequent treaties that the United States enters into. Otherwise, the IRS will continue to fight a losing battle “to those who have parked themselves and their assets beyond their reach.”[xxv]
[i] Brenda Mallinak, The Revenue Rule: A Common Law Doctrine For The Twenty-First Century, 16 Duke J. Comp. & Int’l L. 79, 94 (2006), available at http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1107&context=djcil.
[ii] Id., supra.
[iii] Id, supra, 94-95.
[iv] Id., supra, at 96.
[v] Id., supra.
[vi] Id, supra.
[vii] Id, supra, at 97.
[viii] Id., supra, 95-96.
[ix] Id., supra, at 96.
[x] Tesher v. United States, 246 F.Supp. 2d 297, 299 (S.D.N.Y. 2003).
[xi] Id., supra, at 299-300.
[xii] Keith Fogg, International Collection Efforts by the IRS – Expanding the Number of Treaties in which We Have Collection Language, Forbes, available at http://www.forbes.com/sites/procedurallytaxing/2014/11/18/international-collection-efforts-by-the-irs-expanding-the-number-of-treaties-in-which-we-have-collection-language/
[xiii] ICE Detainers, Frequently Asked Questions (ICE detainers are used to identify and ultimately remove aliens who are currently in federal, state or local custody. ICE relies on the cooperation of state and local law enforcement partners in this effort), available at http://www.ice.gov/factsheets/detainer-faq
[xiv] See Note (xii) at p. 2.
[xv] Id., supra.
[xvi] Id., supra.
[xvii] Id., supra.
[xviii] Id., supra.
[xix] Id., supra.
[xx] Id., supra.
[xxi] Id., supra.
[xxii] Id., supra.
[xxiii] Id., supra.
[xxiv] Id., supra, at p. 1.
[xxv] Id., supra, at p. 2.