Lookout! Delinquent U.S. Taxpayers Are Under IRS and Homeland Security Scrutiny
Delinquent U.S. Taxpayers, IRS is after you!
The clock is ticking … and hiding from the Internal Revenue Service (IRS) continues to be more complicated than ever. Delinquent U.S. taxpayers are being flagged by the Department of Homeland Security (DHS) when crossing the U.S. border and face potential detention, questioning, embarrassment, and other follow-up actions from the IRS. The IRS has been exchanging information on taxpayers with outstanding U.S. tax liabilities with the DHS. Until recently, such information exchange practice appeared to be more or less sporadic. At the time of this article, however, the DHS appears to have caught up with the information that the IRS has been providing over the years and started to successfully put the information exchange practice in action. Note that U.S. citizens and Green card holders are not the only persons affected by these IRS and DHS practices, any taxpayer who owes U.S. tax and is delinquent may be affected.
The current IRS enforcement environment is further enhanced by July 1 entry into effect of most of FATCA (Foreign Account Tax Compliance Act) provisions, including certain withholding and reporting obligations of U.S. withholding agents and intermediaries. The coordination of collection activities between the IRS and the Canada Revenue Agency (CRA) is also on the rise.
There have recently been several instances where U.S. taxpayers were detained and questioned by the DHS when crossing the U.S. border (even in transit) on whether they comply with their U.S. tax obligations. Consequently, those U.S. taxpayers were contacted by the IRS in an attempt to collect outstanding U.S. tax liability. Generally, the IRS sends such U.S. taxpayers Letter 4106 in which it advises the taxpayer about the U.S. tax assessment, tax liability outstanding (including any penalties and interest, as applicable) and any enforcement or collection action that the IRS may be pursuing if the taxpayer chooses to ignore the letter.
U.S. taxpayers residing overseas should consider taking immediate steps to become U.S. tax-compliant as failure to do so may preclude them from entering the United States or may result in certain difficulties, embarrassment, and delays when crossing the U.S. border. The IRS provides several options on how delinquent U.S. taxpayers may come into compliance. Some of them were clarified on June 18, 2014, when the IRS modified the Offshore Voluntary Disclosure Program (OVDP) and enhanced Streamlined Filing Compliance Procedures (SFCP). To read an overview of the changes made by the IRS, please follow this link. For decision-making trees outlining, at a high level, options available to delinquent U.S. taxpayers to become tax-compliant, please follow this link.
Background on IRS and DHS Information Sharing Practice
The U.S. Department of Treasury (Treasury) and the DHS have been successfully implementing the Treasury Enforcement Communications System (TECS) that is designed to assist the IRS in collecting delinquent taxes mainly from taxpayers who reside outside of the United States (the TECS may also be used to target taxpayers with U.S. taxes due and frequently traveling or residing overseas). TECS is a database maintained by the DHS that is used extensively by the law enforcement community. It contains information about individuals and entities suspected of, or involved in, violations of U.S. federal law. See Internal Revenue Manual, 184.108.40.206.
What typically leads to the inclusion on the Lookout Indicator List (the list containing names and certain identifying information on delinquent taxpayers) is the filing by the IRS of a Notice of Federal Tax Lien on the taxpayer’s assets and accounts under Internal Revenue Code sections 6321 and 6320(a)(1). Taxpayers who currently reside outside of the United States may not even know that the IRS issued a Notice of Federal Tax Lien. This usually happens because such taxpayers failed to provide the IRS with their current address.
Our clients usually ask what questions they may have to respond to in case they are detained while crossing the U.S. border. Although there is no list of questions that an agent may ask, there are a few that typically get asked. If a delinquent taxpayer is detained, some of the common questions asked by the Immigration and Customs Enforcement (ICE) agents include the following (the list is non-exhaustive and is provided for illustration purposes):
- Whether they have any assets or bank accounts in the United States;
- What is the purpose and the duration of their trip;
- Where they will be staying in the United States;
- Car registration information;
- Current address;
- S.-related employment information;
- Whether they would perform any personal services in the United States; and
- Other similar questions.
That information is then shared with an IRS coordinator assigned to the case and an IRS agent in the location of the taxpayer’s stay while in the United States.
What should delinquent U.S. taxpayers do?
First of all, taxpayers should not panic. But they should act fast. There is generally a time window within which taking a prompt action may be more beneficial than a delayed one. Taxpayers should seriously consider seeking qualified U.S. tax advice.
“An ounce of prevention is worth a pound of cure,” - they say. Indeed. Rather than doing nothing (surprisingly, there are still cases when delinquent U.S. taxpayers are advised to do nothing when they have outstanding U.S. tax liability), delinquent taxpayers should contact their U.S. tax advisor to evaluate procedural alternatives that may be available to them in order to become U.S. tax compliant. Note that some of such alternatives may be shut down by the IRS at any time (for example, the current ongoing IRS Offshore Voluntary Disclosure Program (OVDP) or Streamlined Filing Compliance Procedures (SFCP)).
Further, delinquent U.S. taxpayers should review their U.S. tax liability and provide the IRS with their current mailing address. This can be done by filing Form 8822. Requesting a taxpayer’s transcript of account from the IRS may be another viable option. This may allow the taxpayer to understand what actions the IRS has already taken, including whether a Notice of Federal Tax Lien has been filed. Filing such a notice leads to reputational and financial risks and complications for delinquent taxpayers. As such, being pro-active in resolving any outstanding U.S. tax liability is more beneficial than trying to resolve the matter later. For example, clearing one’s credit history or removing the taxpayer from the DHS Lookout Indicator List may be more time-consuming and complicated than addressing the outstanding U.S. tax liability in good faith.
Delinquent taxpayers should also remember that they have various procedural alternatives of addressing their U.S. tax liability and that exploring and using such alternatives in a timely manner may require professional U.S. tax advice. Accordingly, they should consult with their U.S. tax advisor on the best course of action to become U.S. tax compliant today, before the IRS contacts them and/or launches examination or an investigation, as the case may be. After all, letting this happen may significantly limit the procedural alternatives available to taxpayers in resolving their U.S. tax obligations.
*Alexey Manasuev is a principal of U.S. Tax IQ, a boutique tax firm with offices in Oakville and Toronto, Canada. Alexey is a U.S. tax lawyer and is a Foreign Legal Consultant licensed to provide U.S. tax and legal advice in Ontario. Alexey can be reached at firstname.lastname@example.org. The views and opinions are those of the author and do not necessarily represent the views and opinions of U.S. Tax IQ. The information contained herein is general in nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax adviser.