IRS Levy of U.S. Taxpayers Living Overseas – International Tax Lawyers
Oftentimes when a person resides overseas in a foreign country, they begin to believe they are outside the reach of the IRS, but this is incorrect. Whether you are residing overseas temporarily or have become an expatriate or “expat,” you still remain subject to US tax law and the IRS has increased enforcement of taxpayers overseas
If you have tax issues with the United States, the IRS has the absolute power to place a levy or lien on your US accounts and possibly foreign accounts under FATCA (Foreign Account Tax Compliance Act). If you have received notice of an IRS audit and/or you have been disregarding IRS notices and/or have started opening the letters only to realize that the language in the letters have become “stronger” and more threatening, you should try to resolve these IRS tax issues as quickly as possible.
The failure to do so can have a major impact on your finances, as well as your freedom to travel.
The following two-part summary will first provide an explanation of what an IRS levy is. The article was printed in NOLO and was authored by lead attorney Sean M. Golding. Next, will also provide you a summary of the proposed IRS law which will revoke U.S. passports of individuals who have more than $50,000 in IRS tax debt.
When you owe money to the Internal Revenue Service (IRS) and sufficient time passes, the IRS has the right to issue a levy against your bank account. An IRS bank levy is a very serious matter in which the IRS will reach into the bank account and take out all of the funds necessary to satisfy the tax debt.
The IRS does not care if the money was going to be used to pay rent, medical bills, or other necessities. The way the IRS sees it is that the money is in your account and therefore, it is fair game.
What Authority Does the IRS Have to Issue a Bank Levy?
Under Internal Revenue Code (IRC) Section 6331, when a person owes a debt to the IRS but fails to pay it within 10 days after the IRS sends a notice and demand to taxpayer, the IRS may begin the process of issuing a levy against the property.
Due to the harsh nature of an IRS bank levy, the IRS cannot just levy a bank account. As a matter of law, the IRS must issue several warnings and satisfy numerous “notice” requirements before issuing a bank levy.
Notice of Demand Letter
The “Notice of Demand” is used to inform you of your IRS debt and make a demand for payment. The notice must be left at either your home or business, or if the current address is unknown, then at your last known address. This notice places you on notice that a tax debt is due and owing.
Despite the fact that a notice of demand was sent to a taxpayer, many times the taxpayer will not respond to the notice. This is usually because IRS notices tend to travel directly from the mailbox into the trashcan in hopes that by not opening the mail, it will make the debt somehow disappear.
As a side note, this is why it is always important to open any mail you receive from the IRS. All too often, a bank levy could have been easily avoided had the taxpayer engaged the IRS earlier in the debt collection process.
The Initial Notice of Intent to Levy: CP-504 Letter
After enough time has passed and you still have not paid your outstanding tax debt (or made arrangements such as an Offer-in-Compromise or Installment Agreement), the next letter you will receive is an IRS CP-504 letter, which is a “Notice of Intent to Levy” letter.
The purpose of this letter is to both inform and scare you – and it is not uncommon to receive multiple CP-504 letters over the span of a few months. The CP-504 letter is a warning that the IRS is slowly but surely working its way towards issuing a Notice of Levy on your bank account. Even though this is not a final notice, it is still very serious and you should be doing everything in your power to try to resolve the IRS debt.
The Final Notice of Intent to Levy: CP-1058 Letter
It may take more than just a few Notice of Intent to Levy letters from the IRS to make you take notice. This will lead to the IRS issuing a final notice of intent to levy letter (CP-1058), which is a very serious letter that requires immediate action. The IRS will not provide you with any more notices before it attempts to levy your bank account and drain its contents.
When you receive this letter, it is important to do everything in your power to try to negotiate a resolution of your tax debt or timely seek a Collection Due Process (see below).
What Do You Do If the IRS Tax Debt is Inaccurate?
If you believe that the tax debt is inaccurate, there are various steps you can take. The most important step is to file a request for Collection Due Process Hearing, which is made on a Form 12153. (For more information, see Nolo’s article, What Is a Collection Due Process Hearing With the IRS?) You only have 30 days from the date of the letter to request the collection due process hearing, but if you file the form timely, then it should stop the pursuit and/or enforcement of the levy at this time.
Otherwise, you may try to negotiate an Offer In Compromise (OIC) Letter, wherein the IRS agrees to reduce the tax debt. Please keep in mind, that the IRS is very strict when it comes to OICs and if you have any assets, accounts (bank, investment, or retirement) or equity in your home, the IRS is less than likely to agree to the OIC.
You can also seek to enter into an installment agreement with the IRS. This is when you enter into an agreement to pay the IRS a set monthly payment over a multi-year period until the debt is satisfied.
There is a reason why the IRS is known as the world’s greatest collection agency. They have the power and the right to go after a majority of your money and assets in to order to satisfy your tax debt.
Don’t make it too easy for them, and always be sure to open up any mail you receive from the IRS!
IRS Passport Revocation
While it used to be that “custom holds” were the main weapon used by the government to interrupt international travel for individuals who may have significant tax liabilities (especially involving international and offshore accounts), the IRS has upped the ante.
There is a law currently pending that would actually deny and/or revoke passports to individuals who have significant tax debt. Although the law is still currently pending, if it is passed, then any taxpayer who has more than $50,000 in unpaid federal taxes 0 including penalties and interest – may be subject to having their passport denied or revoked.
The following is a list of real-life situations that could result in such an outcome, with serious repercussions:
- Passport Revocation/Denial Example 1: David is a US Citizen who likes to travel the world visiting friends and family. David finds out that one of his parents who resides in China is sick. Unfortunately, due to a downturn in the economy David’s business is floundering and he finds himself $75,000 in tax debt to the IRS before he has a chance to enter an installment agreement – according to this new law, the IRS could revoke his passport, preventing him from traveling.
- Passport Revocation/Denial Example 2: Michelle is a US citizen who resides overseas and works for a large company. Michelle was unaware of the requirement to file US taxes and therefore has not filed a U.S. tax return for nearly 8 years (although she would qualify for either the Foreign Earned Income Exclusion or Foreign Tax Credit which reduce eliminate her tax liability). The IRS gets wind of this and charges her account $100,000. As a result, the US government could revoke her passport, leaving her stranded in a foreign country – all because she was unaware of the requirement to file a tax return even though she resided overseas 365 days out of the year.
- Passport Revocation/Denial Example 3: Scott is a US citizen who is currently residing in Italy. Like the prior example, Scott was also unaware that there was a requirement to file US taxes but he has more than enough money saved to pay it off. Unfortunately, the IRS does not have Scott’s current address and therefore Scott never received notice of the tax bill. According to the new law, if Scott’s tax bill exceeds $50,000 he could have his passport revoked without ever receiving notice.
The point of these examples is that there are numerous circumstances in which a taxpayer could be unaware (Negligence) of the requirement to pay US Tax and still have his or her tax passport revoked. As such expats and other U.S. citizens living in a foreign country and/or unaware of the requirement to pay US will undoubtedly get caught in the mix without having any intent to defraud or otherwise avoid paying US tax – resulting in U.S. citizens losing the right to freely travel the world.
For individuals who are stranded in countries with significant dangers, this is almost equivalent to a debtor’s prison, but the IRS does not care. It appears in preparing the cost-benefit analysis of an individual being stranded in a country where their life and their family’s life is in jeopardy versus an unpaid tax, that the unpaid tax debt is the more serious concern for the US government.
*While the IRS indicated it could make accommodations for people whose life is in serious jeopardy – do you really want your lifeline to be depending on IRS?
International Tax Compliance & Tax Debt
For most US citizens who travel internationally, foreign tax compliance will be the main issue that can result in tax debts and tax liens exceeding $50,000. The following is a summary of some of the more common types of international tax forms that must be filed.
- 1120F: Use Form 1120-F to report the income, gains, losses, deductions, credits, and to figure the U.S. income tax liability of a foreign corporation. Also, use Form 1120-F to claim any refund that is due, to transmit Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), or to calculate and pay a foreign corporation’s branch profits tax liability and tax on excess interest.
- 3520: U.S. persons (and executors of estates of U.S. decedents) file Form 3520 to report: Certain transactions with foreign trusts, Ownership of foreign trusts under the rules of sections 671 through 679, and Receipt of certain large gifts or bequests from certain foreign persons.
- 5471:Generally, all U.S. persons described in Categories of Filers below (in the 5471 instructions) must complete the schedules, statements, and/or other information requested in the chart, Filing Requirements for Categories of Filers, on page 2. Read the information for each category carefully to determine which schedules, statements, and/or information apply.
- 5472: Generally, a reporting corporation must file Form 5472 if it had a reportable transaction with a foreign or domestic related party.
- 8938: Use Form 8938 to report your specified foreign financial assets if the total value of all the specified foreign financial assets in which you have an interest is more than the appropriate reporting threshold. See Reporting Thresholds Applying to Specified Individuals (described in detail in the IRS instructions).
- FBARs: FBAR or FinCEN 114 forms must be filed by any individual who has an annual aggregate that exceeds $10,000 for the combined value of all of their foreign applicable bank and financial accounts.
***The failure to file FBARs and 8938s can result in the most tax liability.
Unreported Foreign Income (Non-Willful)
If a taxpayer’s failure to file the FBAR was non-willful, then chances are the taxpayer may be in a position to have a reduction or elimination of penalties. If the taxpayer was non-willful, then that means the taxpayer did have any intent, malice or fraud in failing to comply with FBAR filing requirements — rather, the taxpayer is simply unaware of the requirement to file the FBAR.
Presuming that there was additional income from overseas that the taxpayer did not report and the taxpayer was under examination before the taxpayer had an opportunity to enter the IRS streamlined program, there are four levels of penalties that the IRS could issue:
The IRS has the authority to waive penalties and instead issue a warning letter.
The IRS has the authority to issue one $10,000 penalty for all the accounts for the entire audit period.
$10,000 Annual Penalty
The IRS has the ability to issue a $10,000 penalty for each year that the taxpayer did not file and FBAR. For example, if the audit period is three years, then the IRS could issue penalties in the amount of $30,000.
$10,000 per account/per year
If the IRS agent wants to – even though the taxpayer was non-willful – if the circumstances require it the IRS agent can penalize the taxpayer $10,000 per account, per year for the entire audit period.
**This is one of the key reasons why it is important that a taxpayer does not speak directly with the Internal Revenue Service regarding these types of international tax issues and retains an experience international tax lawyer.
Unreported Foreign Income (Willful)
If a person’s failure to file the FBAR was willful, which generally means intentional, then the stakes are much higher and the penalties much more severe. If a person intentionally failed to file their FBAR, it generally means they also intentionally failed to report their offshore income – which is a form of tax evasion and tax fraud.
The United States taxes individuals on their worldwide income; that means the United States does not care where you earned your income at, you must pay tax on it. For example, if you reside in the United States and earn $10,000 overseas in interest income (even if it was earned in a country that does not tax passive income) you are still required to pay tax on that money in the United States. Although, if you already paid tax in a foreign country already you may be entitled to a foreign tax credit.
In addition, if you sold the home in a foreign country and earn long-term capital gain or short-term capital gain, even if you do not have to pay capital gains enough for country, you have to report it on your US tax return as well. The intentional failure to report can have very serious consequences.
Willfulness May Result in a 100% Penalty of the Overseas Account Value(s)
If you are held to be in willful violation of FBAR filing requirements there can be significant penalties. Generally, the Internal Revenue Service recommends that agents penalize individuals 50% of their highest year balance during the “audit period”. So if you had three accounts overseas with $100,000, $200,000, and $400,000 – you would be penalized $200,000 (per year up to a total of $400,000) – and that is only the standard penalty.
While the IRS will not usually penalize you less than 50% of the highest balance, they could penalize you more. In fact, if you get an IRS agent who is having a bad day or bad week and you get on their bad side, the IRS could potentially penalize you 100% of the account balances. That’s right: the IRS can literally penalize you the full value of your offshore accounts just because you knew you were supposed to, but did not report them.
IRS Form 8938
What if I Do Not File the IRS Form 8938?
The failure to file IRS form 8938 can have a significant impact on the taxpayer. That is because according to IRS law the taxpayer may be penalized: “Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply”
**If you believe you may have tax debts exceeding $50,000, it is time to “Lawyer-Up” with an experienced international tax lawyer.