Moving Overseas Will Not Avoid an IRS Tax Audit (Examples)

Moving Overseas Will Not Avoid an IRS Tax Audit  

For most U.S. Taxpayers, when it comes to the IRS their biggest concern is whether the IRS can take action against them in the United States. The Internal Revenue Service has many options available to them to try to enforce an assessed tax or penalty, such as a Lien, Levy, Jeopardy Assessment, or Passport Denial/Revocation. To avoid the heavy hand of the U.S. Government, some Taxpayers decide to become U.S. expats and leave the United States to live overseas. It is important to note that just living overseas does not mean the IRS is prevented from going after the Taxpayer. Not only can the IRS go after Taxpayers’ U.S. assets, but some countries have entered into mutual collection agreements (MCAR), where one country can formally request the other country to pursue collection activities on behalf of the government. Many different situations can result in IRS enforcement, but let’s go through a few common examples of cross-border audits and what you can do to protect yourself.

*For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

U.S. Person Living Abroad with U.S. Assets

For Taxpayers who may live overseas but have U.S. assets, the IRS can go after the U.S. Taxpayers’ assets, even if they are no longer residents of the United States. In other words, the mere fact that the person is no longer living in the U.S. does not prevent the IRS from pursuing the Taxpayer’s assets.

• • • Example: Joe is a U.S. citizen who currently lives in a foreign country. Even though he works overseas, his employer is based in the United States and Joe maintains a bank account in the United States as well. Joes has an $80,000 tax debt and thinks the IRS cannot come after him because he lives outside of the United States but that is incorrect. The IRS may pursue a levy on Joe’s accounts and wages.

    • Example: Jan is a U.S. Lawful Permanent Resident who currently lives in a foreign country and does not have any bank accounts or wages in the United States — but does own a home which she is getting ready to sell. Even though Jane does not have any U.S. accounts, the IRS could put a Notice of Federal Tax Lien on Jane and that will put buyers on notice that there is a lien pending. While this may not have a direct effect on her being able to sell her home it could play into whether the buyers want to proceed with the purchase that has anything to do that involves the IRS.

    • Example: David is a U.S. citizen who lives overseas and is coming up for a passport renewal. He has not filed U.S. tax returns in several years and owes hundreds of thousands of dollars but is not concerned because he assumes as a U.S. citizen, he is always entitled to have his passport. The IRS assesses fines and penalties against David and then pursues a passport denial when it comes time for David to renew his passport. Since David is not a dual citizen and this is only his passport, it puts him in a very difficult position since he wants to travel back to visit his family.

U.S. Person Living Abroad with No U.S. Assets

Depending on whether or not the United States has entered into a tax treaty with a foreign country can impact how easy or difficult it is for the US government to go after a person’s foreign assets to satisfy the U.S. tax debt. Let’s go through a few different examples, noting that none of these countries have a mutual collection agreement request as part of the treaty.

• • • Example: Michelle is a U.S. Lawful Permanent Resident who lives overseas and does not have any U.S. assets. The IRS assesses $100,000 tax and penalty against Michelle but Michelle lives in a non-treaty country. Even though the IRS can try to go after Michelle, it may prove to be difficult because there is no treaty to rely. While the U.S. Government may seek to revoke her passport due to a tax debt, she is a citizen of three different countries and can travel on a different passport. This may make it difficult for the U.S. to go after michele’s assets.

    • Example: Peter is a U.S. citizen who lives in a foreign country in which there is a treaty which facilitates cooperation between the United States and the foreign country where Peter lives. Peter does not have any U.S. accounts, but he does have assets overseas and so the IRS can try to work with the foreign government and request that the foreign government put a levy or equivalent on the foreign assets so that Peter is unable to use those assets terry this is done to facilitate the IRS’s ability to collect on the tax liability.

U.S. Person Living Abroad in an MCAR Country

When Taxpayers are considered U.S. Persons but they live in a country that has entered into an MCAR as part of the treaty with the United States it can be much easier for the U.S. government to go after the Taxpayer and their foreign assets to satisfy the US tax liability. As provided by the Internal Revenue Manual:

• • • “The IRS can request assistance from certain treaty partners to collect taxes owed by individuals residing and/or having assets in the treaty country. This request is an outbound MCAR. There are six mutual collection income tax treaty partners:

      • • Canada

        • Denmark

        • France

        • Japan

        • The Netherlands

        • Sweden”

    • Example: Denise is a U.S. citizen who currently lives in Canada. She does not have any assets in the United States, but she has several foreign accounts including investment accounts and multiple TFSAs. The IRS can seek to request Canada to levy those accounts to provide the funds to the United States to satisfy Denise’s U.S. tax debt.

    • Example: Scott is a Lawful Permanent Resident who currently lives and works in Japan. While Scott does not have any assets in the United States, he has multiple rental properties in Japan along with a very high value pension and he’s getting ready to begin receiving distributions. If the United States makes an MCAR request, Japan can seize those funds in order to satisfy the US tax debt.

    • Example: Miranda is a U.S. citizen who currently works in Sweden. She has worked in Sweden for many years and has accumulated significant amount pension retirement funds. She was planning on giving up her U.S. citizenship with the assumption that the IRS cannot come after those funds, but because she has an outstanding tax liability and penalties for unfilled forms, the IRS can request Sweden to sees those funds sufficient to satisfy the tax debt.

The Tip of the Iceberg

The goal of this article is to help clarify some of the basics of cross-border tax and penalty enforcement. Reporting foreign income and assets to the U.S. tax authorities can be very complicated, especially when it involves additional items such as foreign life insurance policies, foreign corporations, foreign partnerships, and transactions between U.S. persons and foreign companies. Taxpayers should try to stay in compliance if they are already in compliance or should consider getting into compliance if they have not properly filed the necessary reporting forms if for no other reason than the fact that the IRS has made offshore compliance a key enforcement priority and has been issuing fines and penalties for non-compliance. 

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.  *This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.  Contact our firm today for assistance.