Introduction

Expatriates (Expats) who continue to ignore their obligations to file U.S. Federal Income Tax returns and who fail to report their foreign financial accounts as well as those who fail to file information returns with respect to their interests in foreign entities may soon find themselves the subject of an IRS investigation or other procedural inquiries. Likewise, Expats with outstanding tax liabilities and outstanding FBAR penalties will soon feel the wrath of the Government. I am amazed when I travel overseas and speak with Expats. Many are unaware of the concept that U.S. Tax Persons are required to file U.S. Income Tax Returns and also required to report their income on a worldwide basis. I am equally amazed to find that Expats are neither aware of the tax return disclosures they are required to make, nor are they aware of financial reports that they may be obligated to file. This occurrence seems to be more prevalent in Asian countries and the Middle East, where English is not the primary language.

IRS ways of obtaining financial information from non-compliant Expats

Grand Jury Subpoenas, FATCA and CRS

The Department of Justice is increasingly making use of its grand jury subpoena power as a means of obtaining financial information from non-compliant Expats. Efforts are being coordinated with the IRS Criminal Investigation in response to the treasure trove of financial information regularly being received from countries that are signatories to the Foreign Account Tax Compliance Act (FATCA).

Furthermore, on October 5th 2018, in accordance with the Common Reporting Standards (CRS), Switzerland began automatically sharing client data with tax authorities in dozens of countries. The initial exchange was with the European Union countries and other countries including Australia, Canada, Guernsey, Iceland, Isle of Man, Japan, Norway and South Korea. The information exchanged includes the account owner’s name, address, country of residence and tax identification number as well as the reporting institution, account balance and capital income. It is estimated that about 7,000 banks, trusts, insurers and other financial institutions that are registered with the FTA collect data on millions of accounts.  The CRS was developed in July of 2014 by the Organisation Economic Cooperation and Development (OECD) and calls for the automatic exchange of financial information on an annual basis. Although the U.S. is not a signatory to the CRS, the information may nevertheless find its way into the hands of the IRS.

Cyber Security Threats

The Panama Papers have also been instrumental in assisting the U.S. Government in identifying those individuals, including bankers, attorneys, accountants and investment advisors who facilitated the fraud against the U.S. Government. The information obtained by the U.S. Government from the  Panama Papers has produced countless indictments and convictions including the recent indictment in November of 2018 of an investment manager, attorney and a U.S. accountant as well as a former U.S. resident and taxpayer.  The risk of being unmasked when there is a cyber breach is real and cannot be overstated.  Any information that becomes public is free for the taking and can be used in a subsequent tax prosecution or IRS civil audit.

Pressure on Foreign Financial Institutions

The enactment of FATCA and the stiff penalties financial institutions face for non-compliance has created an atmosphere of suspicion and has resulted in the heightened scrutiny of U.S. Taxpayers, who reside overseas.  Some banks, such as HSBC in Hong Kong have gone overboard and now require documents from Expats over and above the information collected under FATCA and the CRS. This provides additional information which the IRS can use to identify Expats, who are non-compliant. Banks have capitulated, particularly where they have a presence in the United States and are subject to jurisdiction in the United States. Likewise, smaller banks, who do not have a U.S. presence, are feeling the pressure, since they are required to use a correspondent bank in order to transact business in U.S. dollars.

Other Information and Leads

The IRS continues to develop new leads from financial information obtained from taxpayers who have come forward and made offshore disclosures as well as from those individuals and firms who have been prosecuted. They have also able to identify those individuals who made quiet disclosures in order to avoid detection from the IRS. In addition, whistle blowers have provided the Government with valuable information that is being used to aid in criminal tax and FBAR prosecutions. The IRS is employing sophisticated analytics and date mining tools as means of identifying Expats who are non-compliant and continues to work with its global tax partners in identifying tax cheats and those seeking to hide their assets overseas. Finally, the IRS uses social media as a means of identifying tax cheats.

Collection Efforts

Expats who have come clean, but have yet to pay what they owe should also be worried. The IRS is leveraging its collection efforts by utilizing judicial, civil forfeiture and procedural tactics, as well as social media, all of which are designed to enhance the collection of unpaid income taxes and FBAR penalties from Expats.

The Bureau of Fiscal Service (BFS) is responsible for collecting all non-tax debts including FBAR penalties. The IRS may also refer non-tax debts to a private collection contract of to the Department of Justice.  Once the debt is referred to BFS, they are required to take action to either collect or compromise the non-tax debt. They may also suspend or terminate the collection action under 31 CFR § 5.9 and 285.12(b); 31 USC 3711(g) (9).

If the Government elects to file a civil action to recover an FBAR penalty they must initiate the action within two years of the later of the date the penalty was assessed or the date any judgment becomes final in a criminal action that involves the same transaction that resulted in the penalty ( IRM § 5.21.6.6; IRM § 8.11.6.3.1.1). The purpose of filing suit is to reduce the FBAR penalty to a judgment. The bar is quite low in terms of the level of proof the Government is required to show in order to sustain a willful FBAR penalty. In U.S. v Garrity, a suit initiated by the Government to collect a willful FBAR penalty, the Court held that the Government may prove the issue of willfulness by a preponderance of evidence rather than the higher clear and convincing standard. (U.S. v Garrity No. 3:15-cv-00243-MPS (D. Conn. Apr. 3, 2018)). The Garrity decision is consistent with a long line of cases where Courts have held that the preponderance of evidence standard is the standard applied in collection actions filed by the IRS to recover the civil FBAR Penalty. See Bedrosian v. U.S., (DC PA 9/20/2017) 120 AFTR 2d 2017 5832; U.S. v Bohanec, (DC CA 2016) 118 AFTR 2d 2016-6757; U.S. v McBride, (DC UT 2012) 110 AFTR 2 2012-6600; and U.S. v Williams (CA 4 2012) 110 AFTR 2d 2012-5298.

The Government can and often time uses administrative offsets as a means of collecting an outstanding FBAR penalty as well as unpaid income taxes. However, the offset may only be used after there has been an attempt to collect the debt directly from the debtor under 31 USC § 3711(a). In addition, the Government must provide the debtor with “written notice of the type and amount of the claim . . . . 31 USC § 3716 (b) (1). It is noteworthy, that administrative offset is not subject to the statute of limitations under 31 USC § 3716 (e) (1).

Administrative offsets often include payments received from Federal Benefits Programs like Social Security, and can also include tax refunds. There are, however, limitations. If a statute exists exempting a program from administrative offset, then the Government may not use those payments as an offset. The administrative offset of income tax refunds requires that the creditor agency certify, among other things, that the debt is at least $25, past due, legally enforceable and that reasonable efforts have been made to obtain payments. The IRS must also provide the debtor with a 60 day notice that the debt is past due and unless repaid, will be referred to BFS (31 USC § 3720A (b); 31 CFR § 285.2(d)).

Another collection tool is wage garnishment for collection of unpaid income taxes and FBAR penalties. The Government may garnish the wages of non-governmental employees under 31 USC § 3720D (a) but must provide the debtor with a 30 day Notice and the opportunity for a hearing. The debtor is entitled to a hearing if he or she requests one. A cautionary note with respect to a hearing; while the Government has the burden of proving the existence and the amount of debt by a preponderance of evidence, the debtor must prove that the debt does not exist, the amount is incorrect, and the repayment schedule is unlawful or that the garnishment would cause a financial hardship. Once again, a low bar for the IRS.

Once the Government has reduced the FBAR penalty to a judgment, it may then seek to seize and sell the debtors property by judicial sale, even in cases where the property is co-owned with a spouse, against whom the FBAR penalty has not been assessed. The Government can also conduct discovery as to the debtor’s financial condition. In pursuing the collection of a judgment against a debtor, the IRS does, however, have to comply with the Federal Debt Collection Procedures Act. In addition, a Court may order that the debtor make installment payments under 28 USC § 3204.

Increasingly, the Government is contracting with third party agencies as a means of collecting outstanding FBAR penalties (31 USC § 3718(a)) and overdue income taxes. This is a trend, which in all likelihood will continue given the IRS budgetary constraints. Collection agencies usually work on a percentage of money that is collected. This has the effect of reducing the fixed costs associated with the IRS paying salaries and benefits to staff.

Under 31 USC § 3711 (e) Delinquent debts for unpaid FBAR penalties and unpaid income taxes can be and are almost always reported to the credit bureaus, subject to a notice requirements. The debtor must be given a 60 day notice prior to the Government reporting a delinquent debt to the credit bureaus (31 CFR § 5.14, 5.4.).

The IRS is also permitted to enter into installment agreements and may also compromise the debt as a means of settling outstanding FBAR penalties. The latter process, however, requires DOJ approval where the FBAR penalty exceeds $100,000 (31 USC § 3711 (a), (2); 31 CFR § 902.1(a) & (b); IRM § 8.11.6.1(6)).

Consequences facing Taxpayers with significant income tax liabilities

Taxpayers with significant income tax liabilities in excess of $51,000 may suddenly find that their passport has been revoked or that they are unable to renew the passport. This new provision of the law can be particularly stressful to those living overseas. Imagine, you are living in England and have planned a family vacation to Singapore. The IRS sends the Notice to you, but you do not receive it. You pack and head to the airport only to find that your passport has been revoked.

26 USC § 7345 styled as: “Revocation or Denial of Passport in Case of Certain Tax Delinquencies,” provides in pertinent part:

“If the Secretary receives Certification by the Commissioner of Internal Revenue that an individual has a seriously delinquent tax debt, the Secretary shall transmit such certification to the Secretary of State for action with respect to denial, revocation, or limitation of a passport pursuant to section 32101 of the FAST Act” (26 USC § 7345 (a)).

The term “seriously delinquent tax debt” is defined under 26 USC § 7345 (b) (1) as an “unpaid, legally enforceable Federal Tax Liability of an Individual” which (i) has been assessed; (ii) is greater than $50,000 and (iii) is the subject of a federal tax lien or a levy.

Section 7345 only applies to unpaid legally enforceable tax debt and does not apply to unpaid FBAR Penalties or Child Support obligations.

In the event the Expat receives a Notice (Notices CP 508C) from the Commissioner of the IRS, he or she has the option of entering into an installment agreement or attempting an offer in compromise in order to have the Certification vacated. If the Expat believes the Certification is erroneous he or she is also entitled to judicial review and may commence an action either in the United States District Court or the United States Tax Court (26 USC § 7345 (e)(1)). This can pose a particular hardship for Expats, who may be forced to travel to the United States to fight the Notice.

Expats with unpaid tax and FBAR liabilities may be subject to enforcement actions in the foreign country where they reside. The United States has tax treaties with five countries including Canada, Denmark, Sweden, France and Netherlands that contain “assistance in collections” provisions. Other treaties provide for limited assistance in collections. In addition, assistance language may be contained in some multilateral conventions. Traditionally, there has been fierce resistance by foreign Governments when asked to assist in the enforcement of U.S. judgments. However, the landscape is changing, in part, due to the unequal bargaining power the U.S. Government enjoys when dealing with foreign governments.

Finally, those who have counseled, advised or assisted taxpayers in developing schemes to avoid paying U.S. income taxes and/or side stepping the U.S. financial reporting requirements, may now find themselves in the cross hairs of the U.S. Government. In July of 2018 the United States together with Great Britain, Australia, Canada and the Netherlands set up the Joint Chiefs of Global Tax Enforcement (J5), an alliance designed to ferret out individuals and firms that facilitate tax evasion. The J5 was created in response to a call by the Organisation for Economic Cooperation and Development (OECD) for better cross-border coordination in the fight against tax evasion and money laundering. The J5 representative agencies include the Australian Criminal Intelligence Commission and the Australia Taxation Office, the Canada Revenue Agency, the Fiscale Inlichtingen-en Opsporingdienst, HM Revenue and Customs, and the Internal Revenue Service Criminal Investigation. Through active collaboration, the J5 hope to  enhance existing investigations and intelligence programs, identify significant targets for new investigations, improve the tactical intelligence threat picture, and raise international awareness that the J5 is working together to reduce transnational tax crime, cyber crime and money laundering.

Conclusion

In conclusion, U.S. tax and financial reporting and its enforcement continue to evolve and remain a top priority for the IRS. Particularly vulnerable are those taxpayers living overseas who are not in compliance in regards to their U.S. tax and financial filing obligations. Expats who have outstanding tax and FBAR penalties should not be fooled into thinking that they are beyond the reach of the U.S. Government.  Finally, those who have facilitated and aided their clients in setting up foreign bank accounts and sham corporations as a means to perpetrate a fraud on the U.S. Government need to be worried. The IRS is definitely coming for you. The landscape is littered with convicted taxpayers, attorneys, accountants, bankers and other advisers who thought they could game the system. If you are such a person you need to contact a tax attorney who can assist you in coming forward and making a disclosure. In many cases it may be possible to utilize one of the streamlined procedures and avoid paying any FBAR penalty. Of course, you will be required to pay any outstanding income tax, without incurring any penalty.  Resolution for those who have outstanding tax debt and unpaid FBAR penalties is also possible. Alternatives do exist.

If you are at risk, you need to be proactive and seek out the advice of a capable tax attorney. Please feel free to call and schedule a free consultation.