A popular internet inquiry among American citizens and tax residents revolves around safeguarding bank accounts and assets from IRS confiscation during claims. If the IRS alleges tax debts, they often initiate account freezes, potentially paralyzing businesses and hindering individuals from settling their tax obligations or affording legal representation. Virtually any asset, from bank accounts to real estate, can face freezing or confiscation, with exceptions for certain types of income or assets, such as the homestead exemption in specific states or alimony.
Who Reports to the IRS?
The IRS, one of the world’s largest tax authorities, extends its reach beyond the United States, overseeing assets, bank accounts, and income of US citizens and residents outside the country. In a recent press release, the IRS maintains “Eleven attaché offices strategically positioned abroad to tackle financial and tax-related crimes and train foreign government partners on investigative techniques.”
US citizens bear the brunt of IRS taxation regardless of their residence. While global income falls under American taxes, the first approximately USD 100,000 of earned income (excluding passive income) outside the US is exempt, subject to accurate tax reporting. However, not all countries have signed Double Tax Avoidance treaties (DTTs) to alleviate this tax burden.
Failure to file or pay taxes results in IRS-imposed penalties, fines, and potential property confiscation. Alleged tax debts exceeding $50,000 can lead to passport cancellation. In such cases, individuals must initiate lawsuits against the IRS, emphasizing the need to comply with tax laws and timely payments to avoid severe consequences.
Reducing Tax Legally
IRS Account Freeze Circumstances
Contrary to its fearsome reputation, the IRS doesn’t hastily confiscate assets. The process involves:
- Identifying individuals with outstanding taxes through filed returns, bank information, audits, or other sources.
- Issuing a Notice for Demand for Payment, stipulating a specific amount and due date, with accruing penalties for late payment.
- Requesting payment within the specified period, creating a payment plan, or disputing arrangements. Please note: the IRS employs serious mechanisms to encourage timely tax payment.
- Considering non-payment and lack of communication as a refusal, triggering a Final Notice of Intent to Levy.
- Allowing a 30-day negotiation period, after which the IRS can commence confiscation if unresolved.
Assets IRS May Confiscate
The IRS possesses the authority to seize almost any asset located within the jurisdiction of the United States, including but not limited to bank accounts, properties, real estate, and income. Generally, assets held outside the US remain beyond their reach. FATCA mandates foreign banks to report US customers and account information. However, if accused of tax evasion or fraud, the initial action is freezing the bank account, followed by communication with the IRS. Besides bank accounts, the IRS can seize dividends, real estate income, and joint assets, with a primary focus on financial assets and cash.
Exempt Assets and Property
Contrary to the stereotype suggesting that a taxpayer could end up with no possessions following the IRS intervention, there exists a rather extensive list of properties and income sources that they lack the authority to confiscate. The off-limits assets and income include:
- Clothing, shoes, and school textbooks for the taxpayer or their family;
- Fuel, food, furniture, household pets, and personal use weapons costing up to USD 6,250;
- Business-related books and tools totaling up to USD 3,125;
- Unemployment benefits;
- Certain annuities, pension payments, and court-ordered child support;
- Some disability payments, government assistance, and residential property (with small debts), depending on the state.
Unfortunately, the bank accounts where such payments are transferred are not on the exempt list.
Protection vs. Evasion
While a foreign bank account does not shield against tax evasion accusations, it resists easy seizure by the IRS. Americans legally holding foreign bank accounts can employ them as tools against arbitrary IRS seizures. An offshore account offers time and leverage during disputes with the IRS. However, for robust asset protection, unconnected with tax evasion, we can advise using a more complex system.
Disclaimer: Paying income taxes is the duty of all tax residents, including US citizens, with tax evasion carrying legal consequences. You should seek professional support for establishing offshore asset protection. Legal ways exist to reduce tax payments and preserve assets in case of unlawful freezes. Even the IRS can wrongfully freeze an account, necessitating proof of innocence during the inaccessible period. Maintaining multiple foreign bank accounts, preferably in various countries and structures like trusts and foundations, offers protection against arbitrary freezes and confiscations.
Non-Taxable Income Types
Certain types of income remain exempt from US federal taxes, immune to IRS interference. However, the IRS can still seize this income if tax debts exist for other assets. Municipal taxes might apply separately. Examples of such income:
- Payments to veterans;
- Child benefits;
- Social payments;
- Compensation for employees;
- Payments to foster families;
- Payments under the Supplemental Security Income Program (SSI);
- Income from short-term property rentals (Airbnb – up to 15 days per year);
- Insurance payouts for accidents;
- State fund payments to victims of crimes;
- Subsidies for disaster relief;
- Compensations for illness or physical injury;
- Life insurance payments upon the death of the policy owner;
- Interest on certain municipal bonds;
- Combat pays;
- Black Lung benefits (coal mine worker payments).
Nevertheless, the accounts where these funds are deposited can still be frozen. Hence, avoiding IRS issues is vital, as many lives have been affected negatively. For those facing problems, hiring an experienced lawyer for voluntary negotiations with the IRS is recommended. Even without issues, being prepared is wise, considering the potential vulnerability – with a foreign bank account serving as the first line of defense.
In conclusion, managing financial affairs responsibly, and understanding taxation implications is crucial. While foreign bank accounts offer protection, they are only one element of a comprehensive asset management and protection strategy. Staying informed and proactive ensures compliance with tax laws, risk mitigation, and safeguarding financial well-being. Request professional advice on this page. Our specialists can help you embrace a diversified approach that may include offshore bank accounts or trusts and create additional protection for your assets.