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International Collection Efforts by the IRS – Expanding the Number of Treaties in which We Have Collection Language

Posted on Nov. 19, 2014

The United States has treaty language that allows us to work with the taxing authorities in other countries to collect U.S. taxes owed from U.S. Citizens or their property located in those countries and to allow those countries to have IRS collect from their citizens or property located in the U.S.  (For an example of the treaty language used to effectuate bilateral assistance and support in collecting tax, see U.S.-France Income Tax Treaty, Article 28).  In the countries where this treaty language exists, U.S. collection officials initiate the contact with the treaty partners though the competent authority to request that the collection officials in the treaty country take action to collect the unpaid taxes from the assets available in their country.  Currently, the U.S. has this treaty language allowing collection with only five countries – Canada, France, Holland, Denmark and Sweden.  The treaties containing this language were written long ago and the U.S. has not sought to insert this language into treaties in the recent past (For a brief discussion of the history of this treaty language, see Brenda Mallinak, , 16 Duke J. Comp. & Int’l L. 79, 94 (2006)).

As I was writing this post, I received a Treasury Inspector General for Tax Administration (TIGTA) report, Reference Number: 2014-30-054 dated September 12, 2014.  I want to talk about that report and how I think it highlights the problems in international collection while missing the mark because it fails to address the gaping hole in our treaty language as a major source of improving international collection.

The TIGTA report looks at the international collection efforts of the IRS and finds them lacking.  I agree with the conclusion but find that blaming the IRS collectors badly misplaces the blame for the failures in this area.  Congress makes a lot of noise about offshore issues and has implemented some reasonably good legislation to seek to improve matters on the liability side while doing almost nothing to assist IRS collectors in their efforts to put money into our coffers that has moved overseas.  Similarly, Treasury makes a lot of noise about offshore liability issues but has not aided the problem because it has not moved to put collection language into treaties leaving IRS collectors with meager remedies to seek to collect from persons keeping themselves and their assets offshore.  The TIGTA report does not to address the structural problems with the offshore collection system.  Without structural changes the IRS collectors will continue to experience frustration and obtain victories on the margins while losing the battle to those parking themselves and their assets out of the reach of the IRS given the current legal situation.

As the world has gotten smaller and as the movement of people and assets offshore has become routine, the IRS finds itself in a situation not unlike creditors seeking to collect when the Articles of Confederation rather than the Constitution existed.  One of the big reasons for ditching the Articles and moving to the Constitution stemmed from the inability of creditors to collect from persons moving from one state to another.  We now face that situation on a more global level.  We have recognized it over the past fifteen years in the area of finding the money parked offshore in tax havens but we have not yet addressed it in the collection area.

The TIGTA report spends most of its energy talking about failures of vision and implementation in the IRS collection division with respect to its international collection efforts.  I will return to that but want to point out that despite the failures discussed in the report, the 40 or 41 International Revenue Officers collected over $53 million in both fiscal years.  Without knowledge of how the amounts reported were calculated, this seems like a great return on investment for the very small number of people working these cases and a much higher return than normal for dollars invested with the IRS.  Without more context, however, it is impossible to know if this $53 million collected in the past two years is a significant, or I suspect, insignificant amount of the total dollars that might have been collected from citizens and assets parked offshore.

TIGTA criticizes the IRS for a lack of management oversight, the lack of a legitimate strategy and poor procedures and policies for the revenue officers attempting to collect.  While these criticisms undoubtedly have some merit, TIGTA offers little guidance on how the revenue officers might better perform the task of collecting where the money and the taxpayer sit offshore.  Better policies and better training can only do so much when the structure of the system stymies the IRS collection efforts at every turn.

In domestic collection the IRS can file the notice of federal tax lien against the delinquent taxpayer and cripple the person’s credit rating.  It can levy on assets it identifies and obtain property without having to work through a court or through another agency.  Those types of collection efficiencies do not exist for the international collection efforts and may never exist but if international collection has a chance of becoming more efficient, it needs a structure that keeps people from avoiding collection simply by moving themselves and their assets offshore.  If the Government has serious intentions of collecting delinquent taxes from persons moving themselves and their money around the globe, it needs to look to multilateral efforts to solve the problem and not try to go it alone squeezing marginal gains out of an understaffed group of revenue officers.

The TIGTA report mentions the one “easy” collection tool available for collecting taxes from individuals who have parked their money and their assets overseas – the “Customs Hold.”   The report explains this devise as follows:

International revenue officers can request that a Customs Hold be input into the Treasury Enforcement Communication System (TECS) for delinquent taxpayers.  Once the taxpayer is on the TECS, the U.S. Department of Homeland Security (DHS) notifies the IRS whenever the taxpayer travels into the United States.

The TECS is a database maintained by the DHS and is used extensively by the law enforcement community.  Taxpayers are informed with a Letter 4106, Letter Advising Taxpayer of Department of Homeland Security Notification, that an international revenue officer has taken action to advise the DHS that the taxpayer has outstanding tax liabilities and that this may result in an interview by a Customs and Border Protection Officer if the taxpayer attempts to enter the United States.  There is a Memorandum of Understanding [create link to memo] between the IRS and the DHS that allows Customs and Border Protection Officers to stop delinquent taxpayers identified on the TECS to collect their contact information of where they will be staying while in the United States.

According to the TECS Coordinator, the international revenue officer must submit a completed Form 6668, TECS Entry Request, to have a Customs Hold placed on a taxpayer.  The form is sent to the group manager for a signature and e-mailed to the TECS Coordinator.  The TECS Coordinator maintains a spreadsheet to document taxpayer added to or deleted from the TECS.  According to the Spreadsheet there are approximately 1,700 taxpayers on the TECS with approximately $1.6 billion in delinquent tax assessments.  This includes assessments of approximately $1.1 billion solely owed by international taxpayers.

In an earlier post I wrote about the writ ne exeat.  This is a labor intensive option available to the IRS to seek to stop a taxpayer from leaving the country with their money.  The taxpayer discussed in that case was stopped at the border undoubtedly because of a “Customs Hold” as he sought to return to the United States while taxes remained unpaid.  That example demonstrates part of the power of the “Customs Hold” but does not tell the whole story.  Just because someone gets stopped as they seek to reenter the U.S. and sent to a little room off in the corner of an airport does not mean that they will pay the tax or that they will be held in the little room for a long period of time.  Holding individuals as they seek to return to the U.S. no doubt raises revenue but it only works if the individual seeks to return and only when the hold itself proves effective as a means for convincing them to pay.

It is time to expand the list of countries with whom we have collection treaties, to make it a regular part of our bilateral treaties or to begin an effort to make cross border collection of taxes a part of a multilateral effort.  The international revenue officers have only labor intensive tools that rely on the taxpayer living in one of five countries or returning to the U.S.  Their arsenal of weapons no longer matches the ability of individuals to move themselves and their money.  The TIGTA report may have found problems in the operation of the current program but misses the overall problem.  If we want to collect globally we need to ban together with other countries the way we have done with FATCA.  Trying to catch these individuals one by one as they return to the country does not solve the problem.

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