The IRS conjures up many images as an agency that punishes people. Most of that imagery is overblown but the power it has to seek a writ ne exeat republica is one circumstance where people should fear the IRS. Of course, this writ receives very little usage and should not cause concern for most taxpayers. In United States v. Barrett, No. 1:10-cv-02130 (D. Colo.) an order was issued on January 29, 2014, in a case involving this writ which provides a glimpse into the power of this extraordinary collection device.
I will describe the basic circumstances in which this writ may occur, the practical impediments to its use and the circumstances of the Barrett’s case. The Barretts’ case involves the review by the district court of an order of the magistrate judge discharging the writ. The district court declined to discharge the writ leaving the Barretts without the ability to depart the United States for an unspecified time into the future. At the time of his order, the Barretts had already spent three months without their passports; however, surprising to me they have been and probably still are living with friends rather than living in a federal detention facility. As with all cases involving this writ, the facts provide more entertainment than the ordinary tax case.read more...
The case starts with the Barretts filing a fraudulent 2007 income tax return and obtaining a $217,615 refund they should not have received. The dollar amount of their cheating is important, as will become clearer below, because you need a high dollar amount in order to have the case in the hands of a revenue officer and you generally need a sharp eyed revenue officer in order to identify this type of case. Once the IRS figured out that the Barretts had fleeced them and assessed a liability against them, it set out to recover the funds. Meanwhile, the Barretts set out to move their assets and themselves out of the United States and beyond the reach of the IRS.
The writ ne exeat republica is designed for this very situation. It allows the government to hold someone seeking to flee from the payment of their debt. The object of holding them is to persuade them to repatriate their assets and satisfy the debt or as much of the debt as possible. The tricky part for the government involves identifying the individuals who have moved their assets offshore, who are preparing to move themselves offshore and who have not yet done so. The government not only needs to identify these circumstances but it must do so in time to get to court, obtain the writ and have the federal marshals apprehend the taxpayer about to leave. As you can imagine the circumstances in which the government can accomplish all of these acts rarely occur, leaving the writ ne exeat republica a little known remedy in the government’s collection arsenal.
A 1998 Field Service Advisory opinion described the writ ne exeat republica as follows:
[A] writ of ne exeat republica is an extraordinary collection remedy which may result in a taxpayer being temporarily confined in prison (if unable to post suitable bon) for the taxpayer’s non-payment of federal taxes, where the Service can show generally: (1) the existence of significant tax liabilities; (2) the taxpayer has a present ability to pay the tax liabilities; but (3) the taxpayer has chosen instead to attempt to place both himself and his assets beyond the collection jurisdiction of the United States.
The writ ne exeat republica is almost 100 years old. It came into existence in the Revenue Act of 1918. For some history on the provision and the thinking when it was passed see Anthony E. Rebollo, “The Civil Arrest and Imprisonment of Taxpayers: An Analysis of the Writ of Ne Exeat Republica.” The article also details the most significant cases involving this writ. If you read the article, you will see how few of these cases exist. In representing the IRS for over 30 years with a heavy emphasis on collection matters, I saw only a handful of cases where this writ was even attempted. The one case I personally worked in which the writ was sought fell short of the writ because of a lack of time to get everything in place in order to apprehend the individual during his brief return to the United States. The effort to mobilize the necessary legal and law enforcement resources to affect this writ impressed upon me the extraordinary nature of this remedy. In that case there was an asset that we knew would draw the taxpayer back into the United States on a specific date which turned out to be too close in time to allow for all of the work necessary to obtain and excute the writ.
When taxpayers are out of the country the IRS looks carefully for assets in the United States and for the opportunity to use the collection provisions of tax treaties if the taxpayers have gone to certain countries. Here the IRS had a slightly different avenue because it preplanned for their return by getting the writ after they left. This may be the most effective strategy for the IRS.
So, I read with interest the Barrett case looking for clues on how the IRS found out in time the circumstances needed to obtain the writ and apprehend the Barretts. The facts reveal a slow moving writ case rather than a fast paced one because the IRS obtained the writ here after the Barretts and their money had fled the country. The situation then became one of waiting for them to return and finding them when they did so. I do not mean to diminish the effort needed to succeed in the execution of the writ against the Barretts but it presents a different situation than one in which the writ is sought during the brief window before the initial departure or the brief window during reentry and departure.
The IRS initiated the court proceeding for the writ on September 1, 2010, and obtained a writ on December 2, 2010 ordering that the Barretts be (1) restrained from departing the jurisdiction of the Court; (2) required to post security for their tax obligation of over $350,000; (3) held by the U.S. Marshal pending a final hearing; (4) required to produce all books and records of their assets; and (5) prevented from further encumbering their assets. By the time of this order the Barretts were in Ecuador. Although they were served in Ecuador, the district court did not have jurisdiction to execute the order. Had they decided to stay in Ecuador that would have ended the matter. Alas, they decided to return to the United States to attend their daughter’s wedding. Apparently, no one told them about destination weddings available outside the United States. For a detailed recitation of the facts see Jay Adkinson’s blog post here.
What is unstated in the opinion yet, and which is the key to the case, is how did the IRS learn that the Barretts had returned to the United States. Someone had to pick this up and alert the U.S. Marshals. It is possible that U.S. Customs picked it up because of a code on their passport which was scanned as they reentered the country but that information does not come out in the opinion. Interestingly, after being picked up by the Marshal’s office, the Barretts were not incarcerated. Instead, their passports and international travel documents were taken but they have been allowed to live with relatives in Colorado.
The Magistrate Judge hearing the case adopted the four part test set for in United States v. Mathewson necessary to obtain a writ ne exeat republica or to continue it: (1) a substantial likelihood of success on the merits; (2) irreparable injury; (3) which outweighs the potential harm to the defendants; and (4) that continuation of the writ would not disserve the public interest. The Barretts put on evidence that their overseas assets had little value by this point and the Magistrate Judge recommended dissolving the writ. The district court agreed with the applications of the factors from Mathewson but reversed the decision of the Magistrate Judge. The default judgment obtained against the Barretts established the existence of the liability and satisfied part one of the test. The District Court found that the public interest in the collection of taxes satisfied part four of the test. The Barretts’ actions in fleeing the country in the first place, lying on recent financial statements and doing everything possible to avoid paying the taxes suggested that letting them go could result in irreparable injury to the ability of the IRS to collect the tax and the existence of some overseas assets available to the Barretts to satisfy or partially satisfy the liability suggested that the potential harm to the IRS outweighed that to the Barretts. Although unstated, the order seems to leave in place the existing circumstance that the Barretts could continue staying with friends in Colorado, the federal district from which the writ ne exeat republica was issued.
The easy lesson here for taxpayers in the Barretts situation is not to return to the United States once they have set on this course and particularly where the IRS has gone to the trouble to obtain the writ during your absence. Had they not returned to the United States, the IRS would have had few, if any, options to apply in collecting this tax. One thing the Barretts got right that taxpayers should think about if they decide to flee the United States with their assets is not to go to a country with which the United States has a collection provision in the tax treaty. When I last worked on this issue several years ago those countries were Canada, France, Netherlands, Denmark and Sweden. Parking assets in one of those countries may prove unsatisfactory if the IRS is really serious about pursuing collection.