IRS Collections: Different Rules for Foreign Debts? – Houston Tax Attorneys

The United States is built on fundamental principles of rule of law, due process, and justice.

These concepts are not merely abstract ideals but are deeply ingrained in our legal system and societal expectations. They form the bedrock of what many consider to be American exceptionalism – a system where laws are transparent, consistently applied, and where individuals have the right to be heard and seek redress when they believe these principles have been violated.

In practice, these ideals are often upheld not through legal battles, but through a shared understanding and respect for “the system” by all parties, including government actors. This collective belief or assumption that the actors are adhering or will adhere to principles of fairness and justice is what allows our legal framework to function effectively.

This brings us to the question of whether these protections apply to non-citizens lawfully residing in the United States. The recent Ryckman v. Commissioner, T.C. Memo. 2024-75, court case addresses this in the context of whether non-citizens lawfully residing in the U.S. are to be afforded these protections against unlawful IRS collections when the IRS is trying to collect taxes for a foreign government.

Facts & Procedural History

The taxpayer, a Canadian citizen, moved to the United States owing approximately $200,000 in Canadian taxes for the years 1993 and 1994.

In 2017, the Canada Revenue Agency sent the IRS a mutual collection assistance request under the U.S.-Canada Income Tax Treaty, to try to collect the $200,000. The IRS accepted this request and subsequently filed a notice of federal tax lien against the taxpayer.

When notifying the taxpayer of the NFTL filing, the IRS stated that she had no right to a Collection Due Process (“CDP”) hearing under Sections 6320 and 6330 of the tax code.

Despite this, the taxpayer filed a request for a CDP hearing within 30 days. The IRS denied this request and the taxpayer filed a petition with the U.S. Tax Court for review of the denial.

At issue in this case is what rights do those living in the U.S. have as it pertains to IRS collections of foreign tax debts?

About IRS Collections

As explained below, the tax treaties generally say that the IRS is to collect taxes for foreign countries as if they were taxes owed to the U.S. Thus, to understand what rights those residing in the U.S. have when it comes to the IRS collecting taxes for a foreign country, we have to start with a basic understanding of what rights folks have for taxes owed to the United States.

The IRS has broad authority to collect unpaid taxes. This includes the power to file IRS liens and IRS levy or take assets. The IRS lien is the primary tool that the IRS uses to collect taxes. We’ll focus on the IRS lien as that is what is at issue in this case.

About the IRS Lien

The IRS lien is a public notice that the taxes are due. That is all it is. While that sounds innocuous, the power of the lien is in the simplicity of it and how it shifts collections to third parties.

The lien notice is just a piece of paper filed with the county clerk and/or state secretary of state. The IRS has a form and standard cover letter for it. It takes very little effort for the IRS to prepare and to file. It requires no maintenance as it just sits there in the public filing for years–usually a decade.

The IRS often does not have to do anything else to act on the lien. The lien attaches to all property, basically (with some exceptions). It is often the passing of time and the taxpayer’s life circumstances that do the collection for the IRS. The taxpayer either wants to sell or refinance property, dies and needs to transfer property, or some other event results in a transfer of property and interjects a third party into a transaction. It is the third party that then has to comply with the lien, which often results in money or proceeds being remitted to the IRS.

The IRS Collection Due Process Hearing

Given the broad IRS collection powers, Congress put procedural safeguards to protect taxpayers’ rights during the collection process. Two key protections are found in sections 6320 and 6330 of the tax code.

Section 6320 requires the IRS to notify a taxpayer within five business days after filing a notice of tax lien. This notification has to tell the taxpayer of their right to request a CDP hearing. Section 6330 requires the IRS to notify a taxpayer of their right to a CDP hearing before proceeding with a levy. Thus, the taxpayer gets two chances at a CDP hearing for each tax period that the IRS tries to collect.

The CDP hearing provides taxpayers with an opportunity to challenge the appropriateness of the collection action, propose collection alternatives, and in some cases, challenge the underlying tax liability. Importantly, they also provide an avenue for judicial review in the U.S. Tax Court if the IRS does not follow the law.

This process ensures that the taxpayer’s Constitutional due process rights, a fundamental aspect of what it means to be and live in America, are respected. As dramatic as this sounds, the CDP hearing is fundamental to what our system of governance is all about–the concept that your life, liberty and property will not disappear to the government in the middle of the night without careful consideration and being visible to the public, as with a public court hearing, and without a remedy to contest.

The U.S.-Canadian Tax Treaty

This brings us to the concept of tax treaties. The United States has tax treaties with numerous countries to prevent double taxation and facilitate cooperation in tax matters. The U.S.-Canada Income Tax Treaty, like many others, includes provisions for mutual assistance in tax collection.

Article XXVI A of the U.S.-Canadian tax treaty outlines the process for one country to request assistance from the other in collecting unpaid taxes. These types of provisions help ensure that tax cheats cannot simply slip across the border and avoid paying their taxes. To allow this to happen would undermine the tax system for both countries.

When such a request is made and accepted, as noted above, the requested country (in this case, the United States) is obligated to treat the foreign tax debt as if it were its own for collection purposes. This means that the IRS is to collect the Canadian tax balance as if it were owed to the United States. This brings in the typical IRS lien and IRS levy as the collection options.

Treaty Obligations vs. Taxpayer Protections

This brings us to this court case. The court case addresses a potential conflict between the United States’ treaty obligations and the procedural protections typically afforded to taxpayers under our laws. The core issue is whether the IRS, when collecting Canadian taxes under the treaty, must provide the same CDP rights that would apply to the collection of a U.S. tax debt.

The majority opinion of the U.S. Tax Court interpreted the treaty to mean that once Canada certifies a tax debt as “finally determined,” the United States must treat it as if all administrative and judicial rights to challenge the collection have been exhausted.

This is based on the premise that even a U.S. taxpayer owing a U.S. tax debt only gets one CDP hearing. Presumably, the foreigner owing foreign taxes has had a similar right or process before the certification by the foreign government. The majority of the U.S. Tax Court presumes that this is the case.

This puts full faith and credit in the foreign government (for example, it assumes that the foreign government didn’t violate its own collection rules) and it assumes that the foreign government’s collection protections are equivalent to or similar to those afforded citizens and residents of the United States. This interpretation effectively precludes the taxpayer from enjoying the CDP protections that would normally be available for U.S. tax debts.

The dissenting opinion, however, argues for a harmonious interpretation of the treaty and U.S. law that would preserve CDP rights. The dissent contended that while the treaty may preclude challenges to the underlying liability, it should not be read to eliminate procedural protections related to the collection process itself. This would afford the foreign resident collection due process rights to ensure that the IRS doesn’t simply levy on their financial accounts with no notice. Absent a judicial review process like the CDP hearing request, it seems that the IRS can do just that.

Given this opinion, whether justifiable or not, the IRS appears to have the authority to bypass the lien process and proceed directly to levying the U.S. resident’s accounts to collect foreign taxes, potentially without providing the customary procedural safeguards. The U.S. resident may have no U.S. remedy or recourse.

The Takeaway

It’s well-known that one cannot avoid paying non-U.S. taxes owed to a country with a U.S. tax treaty by moving to the U.S., as the U.S. might (in some limited cases) help the foreign country collect the taxes. So Canadians sometimes cannot avoid paying Canadian taxes by moving to the U.S. But given this court opinion, those same foreigners need to carefully consider whether to move to the U.S. in the first place. Moving to the U.S. while owing taxes to a tax treaty country might mean forfeiting important U.S. legal protections and, as in this case, result in the foreign tax being collected with no procedural or judicial safeguards.