Foreign Income & Taxpayers
The IRS has established procedures to facilitate tax collection from taxpayers who live outside the United States. If a taxpayer has an unpaid tax liability and is subject to a resulting Notice of Federal Tax Lien, the IRS may submit identifying taxpayer information to the Treasury Enforcement Communications System (TECS), a database maintained by the Department of Homeland Security (DHS). The database allows the DHS to identify taxpayers with unpaid tax assessments who are traveling to the United States for business, employment, or personal reasons (Internal Revenue Manual (IRM) §18.104.22.168). As a result, taxpayers traveling to the United States with unpaid tax assessments increasingly are being detained at the border.
A U.S. or non-U.S. person whom the IRS has been unable to contact may be unaware of an assessed but unpaid federal tax liability until the person goes through U.S. Customs and is detained by Immigration and Customs Enforcement. U.S. Customs agents may detain these individuals to ascertain what assets they have in the United States, the duration of their trip, where they are staying, vehicle registration information, and similar information. Agents also may inquire about the taxpayer’s employment relationships in the United States or any personal services performed in the United States, to establish wage garnishment opportunities. Thereafter, U.S. Customs agents will alert an IRS coordinator and transmit this information through a referral program. Typically, an investigation request will be sent to an IRS agent in the region in which the taxpayer is traveling to follow up with the taxpayer (IRM §22.214.171.124).
TECS and Notice of Federal Tax Lien
The procedures governing TECS have two key requirements for taxpayer information to be included:
1. The individual taxpayer must live outside the United States; and
2. The individual taxpayer must have an existing filed federal tax lien (IRM §126.96.36.199.5.1).
A Notice of Federal Tax Lien may be filed on a taxpayer’s real or personal property under Sec. 6321 when the taxpayer fails to pay taxes allegedly owed after the notice-and-demand period expires. A Notice of Federal Tax Lien that is properly filed has the effect of publicly alerting creditors that the IRS has a priority claim against the taxpayer’s real or personal property. If a Notice of Federal Tax Lien is filed in the wrong location, the IRS will not have priority over a later purchaser, holder of a security interest, mechanic’s lienor, or judgment lien creditor.
A Notice of Federal Tax Lien is filed in the office designated by the state where real property is physically located (Sec. 6323(f)). For personal property, the Notice of Federal Tax Lien ordinarily is filed in the county in which the taxpayer resides or in any other office designated by state law. However, taxpayers who reside outside of the United States, the targets of this program, are deemed to reside in Washington, D.C., for lien filing purposes. Accordingly, the Notice of Federal Tax Lien is filed with the Recorder of Deeds for the District of Columbia (IRM §188.8.131.52.2).
Information reflected in a Notice of Federal Tax Lien, which may be entered onto TECS, includes the contact information for the individual and the amount of the unpaid tax. Taxpayer information may not be disclosed to TECS without a properly filed federal tax lien because Sec. 6103 protects taxpayers from improper disclosures of their tax return information. As a general rule, returns and tax return information are confidential and may not be disclosed to federal or state employees or agencies unless expressly allowed by statute.
Sec. 6103 does not specifically authorize the disclosure of return information that already is part of the public record. However, the U.S. Supreme Court ruled in a line of cases that there is no reasonable expectation of privacy for matters that are part of the public record. See Nixon v. Warner Communications, Inc. , 435 U.S. 589 (1978); Cox Broadcasting Corp. v. Cohn , 420 U.S. 469 (1975); and Craig v. Harney , 331 U.S. 367 (1947). Consequently, the IRS takes the position that the disclosure of information taken from the public record is not an unauthorized disclosure under Sec. 6103. Under this position, information reflected in a properly filed Notice of Federal Tax Lien is part of the public record and may be submitted to TECS without violating the disclosure laws.
IRS disclosure of taxpayer return information to the DHS through TECS can have broad consequences. The IRS relies on the general proposition that taxpayer return information that is part of the public record is not subject to disclosure limitations. A withdrawal or release of the lien, and certain other prerequisites, are required for removal of the taxpayer’s information from TECS (IRM §184.108.40.206.5.4). Thus, the lengthy process to remove information from TECS may result in detention at the border for travelers to the United States for a period of time after the lien has been released or withdrawn.
A taxpayer who resides outside the United States may not be aware of outstanding federal tax liabilities if the address on record for the taxpayer is outdated or otherwise incorrect. Consequently, tax advisers with clients who reside outside the United States should ensure that the correct address for the taxpayer is used on the client’s returns and, if the client no longer is required to file U.S. returns, that the IRS still is able to contact the taxpayer about previously filed returns. Taxpayers should be advised that the failure to keep the IRS apprised of a change in mailing address may result in an unwelcome, and potentially embarrassing, surprise from the DHS when the taxpayer seeks to enter the United States through Immigration and Customs Enforcement.
Annette Smith is a partner with PwC, Washington National Tax Services, in Washington, D.C.
For additional information about these items, contact Ms. Smith at 202-414-1048 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with PwC.