Tax Treaties Create Collection Agencies


If you are under the impression that the IRS is the only tax collection agency that exercises extraterritorial power, think again! This issue is especially concerning for those who live in one country and have tax debts in another. Thanks to tax treaties, governments increasingly have the ability to pursue taxpayers across borders.

Let’s look at a recent example of a Canadian who thought he had found a way to beat the tax system.

The taxpayer, we will call him John, moved to the U.S. from Canada leaving behind a tax debt in Canada.  The Canadian tax liability had arisen when John sold some Canadian real estate. When the Canadian Revenue Agency tracked John down in the U.S., they decided to enlist the U.S.’ help by taking advantage of the U.S. – Canada tax treaty, which contains a provision allowing for a Mutual Collection Assistance Request.  In other words, either government can request the other to collect the unpaid taxes on its behalf, in this case, the IRS would do the collecting.

Naturally, John was not happy when he found out about this and filed a complaint in U.S. District Court seeking injunctive and declaratory relief; he didn’t believe that the IRS had the authority to collect his Canadian taxes.

Unfortunately for John, the Anti-Injunction Act (AIA), Code Sec. 7421(a), a statute that stops the federal courts from preventing the government from assessing and collecting taxes, denied his suit. Legally the court could not intervene on John’s behalf. And, the reason for this was that according to the treaty provisions between Canada and U.S., the liability owed by John was treated as a “federal tax” owed to U.S. tax authorities who would then turn the funds over to Canada. The Canadian tax liability now became a U.S. tax liability for collection purposes and the AIA would not permit the court to hear the taxpayer’s action.

While this all sounds like legal IRS mumbo jumbo, the bottom line is that more and more countries are partnering up to collect each other’s taxes.  The safeguards or provisions in treaties, make it more difficult for taxpayers to simply skip out on their tax liability and assume they are safe.  Our advice to you is to stay compliant! You can’t beat the tax system; only prolong the eventual outcome.

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