The taxman waits for no one. Unable to file tax returns while wrongfully detained, hostages are often welcomed home with a tax bill. In this case, the three freed Americans who were held hostage in Russia are now facing fines and Internal Revenue Service fees assessed while in captivity.
Wall Street Journal reporter Evan Gershkovich, former Marine Paul Whelan, and Russian-American journalist Alsu Kurmasheva were released as part of a complex prisoner exchange on August 1, 2024. Gershkovich was detained for nearly 1 1/2 years, Kurmasheva for nearly 10 months, and Whelan for over five years. Now that they're home, they'll have to get their affairs in order, including sorting out IRS penalties and accumulating interest assessed on individuals who fail to file their tax returns. When it comes to issuing fines, the IRS does not distinguish between illegally detained citizens and those unscrupulous individuals who avoid taxes, since there is no possibility of remission or postponement during wrongful detention.
According to the IRS, the failure to file penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late; the penalty will not exceed 25% of the unpaid taxes. After this period, non-payment of the fine will continue until the tax is paid, up to a maximum of 25% of the unpaid tax, plus interest.
In one statement on the matter to Fox NewsThe IRS said the agency is “committed to working with any individual who has been held hostage or unlawfully detained to resolve any tax issues that may arise from these shocking and unconscionable situations” and is “fully prepared to worked with affected tax filers and their families – as well as Congress – to secure maximum sentence relief and any other appropriate relief available under federal law.
Taxing these individuals in the first place seems unfair and a slap in the face, but, unfortunately, it's not the first time it's happened, as a growing number of Americans are being wrongly detained by hostile government regimes. According to a 2023 Wall Street Journal ITEM, Washington Post Correspondent Jason Rezaian, released by Iran in 2016 after 544 days of wrongful imprisonment, was handed a $200,000 tax bill for unpaid taxes. He stated that while the IRS apologized for his tax bill, he was able to get the agency to reduce the amount he owed to about $6,000, stating that “(w)hilst the agency has some discretion to waive penalties, it does not does have the legal authority to waive taxes or interest on the basis that the filer was wrongfully detained.”
Proposed legislation
After hearing about Rezaian's ordeal, U.S. Sen. Mike Rounds (RS.D.) co-sponsored a proposed new bill, “Prohibiting American Hostage Tax Penalties,” that would amend the Internal Revenue Code to prevent the IRS from imposing penalties. for illegal detainees and hostages who lose payments while held abroad. The bill passed with bipartisan support in the Senate, but now remains in limbo as it waits to pass the House of Representatives.
Help available
Meanwhile, “whether you're an astronaut stranded in outer space or a prisoner detained in a foreign country, the IRS has penalty relief available to you for filing and paying your taxes late,” said Harvey Bezozi, a tax expert who regularly handles complex IRS penalty abatement cases.
“Pursuant to Section 20.1.1.3.2.2.1 of the Internal Revenue Manual (IRM), entitled 'Death, Serious Illness, or Unavoidable Absence,' reasonable cause, the gold standard of IRS penalty relief, may be granted for filing, paying or depositing late taxes due to unavoidable absence if tax compliance responsibilities are attended to within a reasonable period of time after returning from unavoidable absence,” he added.
Michael Carlinfounding partner at Karlin & Peebles, LLP in Los Angeles, also opined that “most of these convictions are subject to reasonable defenses, and I would think that wrongful (or even rightful) imprisonment in a foreign country would qualify.” Karlin said that while people who pay tax through employee withholding do not have to pay estimated taxes, in a case where there may be additional taxes for late or nonpayment of estimated taxes, there is an exception under IRC Section 6664(2 ) that appears to fit the circumstances of the three inmates: “to the extent that (the IRS) determines that because of casualties, disasters, or other unusual circumstances, the imposition of such a tax surcharge would be against the equity and conscience of good.”
“Interest cannot be waived, so if someone was behind on their taxes, they would owe interest,” Karlin said.
Finally, he added, “If any of these people had foreign bank accounts that were required to be reported to FinCEN on a Report of Foreign Banks and Financial Accounts” (FBAR), there is also a reasonable cause defense for penalties related to failures in the FBAR file.”
In case you are wondering, two astronauts currently trapped in space they are not even safe from taxes. The IRS does not consider international airspace, international waters, or outer space to be foreign for tax purposes, which means they are still responsible for filing their US taxes on time. Fortunately, unlike most prisoners, astronauts stuck on a mission can usually communicate and may be able to file (or have an accountant file) for an extension from space.