TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

People who owe taxes to the United States often ask whether they might be detained entering or leaving the U. S.

In 2008, Charles and Kathleen Barrett filed a fraudulent tax return for the 2007 tax year that resulted in a $217,615 tax refund to which they were not entitled.[1] The Internal Revenue Service discovered the fraud in February 2009. Although the Barretts filed a return in March 2009 in which they acknowledged that the tax withheld was incorrectly reported, they did not return the wrongfully obtained refund. The government has been trying through various means to find and obtain assets to apply to the debt since that time.

On September 1, 2010 the United States filed an action in Colorado, alleging that the Barretts had removed certain funds from the United States, and seeking an order and judgment requiring that the funds be repatriated to be applied to their tax debt. In an effort to identify assets available for application to the debt, and to collect such assets, the United States on November 4, 2010 filed an ex parte sealed motion for the issuance of a “writ of ne exeat republica” against the Barretts.

A writ of ne exeat republica is a form of injunctive relief ordering the person to whom it is addressed not to leave the jurisdiction of the court or the state, for example, to aid the government to compel a citizen to pay his taxes.[2] It is an extraordinary writ that restrains the Barretts’ constitutional right to travel. As such, the government bears a heavy burden to show exceptional circumstances warranting such relief.[3]

On December 2, 2010 the District Court granted the motion of the government and ordered (1) that a writ be issued to restrain the Barretts from departing the jurisdiction of the Court until further court order; (2) that they be required to post security for their tax obligation, penalties and interest either in the amount of $351,196.97 or in the amount of the value of their net equity in their worldwide assets; (3) that they be kept in the custody of the United States Marshal pending a final evidentiary hearing; (4) that they produce all books and records of their assets; and (5) that they may not assign, encumber or otherwise alienate any property belonging to them. An evidentiary hearing was set for December 2, 2011. An amended version of the order was issued on December 13, 2010. The writ was formally issued by Magistrate Judge Boland on the same date.

In the meantime, the Barretts had relocated to Ecuador. They were served there on December 21, 2010. Accordingly, the writ of ne exeat republica lost any benefit at that time, since they apparently had left the jurisdiction of the United States before it was issued.

Since the Barretts did not respond to the government’s underlying Complaint seeking repayment of the tax refund and other associated amounts, a default judgment was entered against the Barretts. The Barretts were also ordered to repatriate certain funds that they had wired to the Banco de la Republica Oriental del Uruguay, and the United States was awarded its costs. The Barretts did not comply with the order to repatriate the funds wired to the Uruguay bank.

In the summer of 2013 the Barretts visited the United States, apparently to attend their daughter’s wedding. On August 8, 2013 United States Marshals detained them pursuant to the writ of ne exeat republica. The Barretts were ordered to turn over their passports and any international travel documents to the District Court and to remain within the United States. They have been living with relatives in Colorado since they were detained.

At an evidentiary hearing, it was determined that the Barretts had limited assets in Ecuador having a likely combined value of approximately $48,000. In order to obtain a writ of ne exeat republica, or in this instance to continue the writ in effect, the government had the burden to prove (1) a substantial likelihood of success on the merits, (2) irreparable injury, (3) which outweighs the potential harm to the Barretts, and (4) that continuation of the writ would not disserve the public interest.[4] The primary issue was whether the government could identify any substantial assets of the Barretts existing outside the United States which were capable of liquidation to satisfy the tax debt. If there were no such assets, the Barretts’ departure from the United States would not substantially prejudice the collection efforts of the government to satisfy the default judgment.

The Barretts have no substantial assets remaining in the United States. The government was able to establish that the IRS has few other tools remaining to use to collect against the Barretts’ foreign assets. The District Court determined that it is in the interest of the public that the government collect taxes due and owing to the United States.

Based on the foregoing, the sole remaining issue for resolution of the writ issue turned on a comparison of the injury to the Barretts if the writ is continued as compared to the injury to the United States if the writ is discharged (which would allow the Barretts to depart from the United States). In that regard, the District Court noted, contrary to suggestions occasionally made by or on behalf of the Barretts during the history of the case, that the foregoing detention does not represent a “debtor’s prison” situation. The Barretts are not in custody but by reason of the writ but they are prohibited from departing the United States. However, the District Court determined that their detention is not based on their failure to pay their debt. If they cannot afford to pay it, then they cannot be detained. Rather, their continued detention would only be proper if the government could prove that they have assets outside the United States that they could apply to the debt but which they have unreasonably refused to apply.

The District Court set forth various items in the court record stated to cast significant doubt on the credibility of the Barretts’ testimony. Specifically, the Court stated, in part, that:

“• The Barretts obtained a large tax refund fraudulently. They chastised the government for not proving that they signed the 2007 tax return and attempted to blame it on a maverick accountant. When the government produced a copy of their signatures they suggested (with absolutely no evidence) that the government might have superimposed their signatures.

• In any event, they did not return the improperly obtained refund.

• 100% of the money the government has collected to date has been the result of levies and other collection measures. To date, the Barretts have not voluntarily paid anything. The record belies any notion that this is because they could not afford to pay anything.”

In concluding that the writ should remain (requiring the Barretts to remain in the United States and not return to Ecuador), the District Court stated that the court record established that the Barretts have assets available to pay the debt down by at least an additional $16,000. To at least that extent, the Court concluded that “the harm to the United States of losing the opportunity to obtain those funds outweighs the harm to the Barretts. The key to the door is in the Barretts’ hands.”

Lastly, the Court felt there was insufficient information regarding foreign real property to make an appropriate determination. To obtain relief from the writ, the Barrets were ordered to sell the property and provide the proceeds to the government or prove, with credible evidence, that they actually cannot sell it. The writ should be discharged upon a showing by the Barretts that there is little or no money available from the property.[5]

In summary, the writ of ne exeat republica is an extremely powerful tool available to the government prohibiting tax debtors from leaving the United States. In most situations, people traveling through the United States will not be detained. The constitutional right to travel will only be disrupted if the government can satisfy its heavy burden showing exceptional circumstances warranting such relief. As of the date hereof, the Barretts are still prohibited from traveling outside the jurisdiction of the United States . . .