The tax man waits for no one. Unable to file tax returns while wrongfully detained, hostages are often welcomed back to the homeland with a tax bill. Case in point, the three freed Americans who were held hostage in Russia are now facing Internal Revenue Service fines and fees assessed while they were in captivity.
Wall Street Journal reporter Evan Gershkovich, former marine Paul Whelan and Russian-American journalist Alsu Kurmasheva were freed as part of a complex prisoner swap on Aug. 1, 2024. Gershkovich was detained for nearly 1 1/2 years, Kurmasheva for almost 10 months and Whelan for over five years. Now that they’re home, they’ll need to get their affairs in order, including sorting out IRS penalties and accruing interest assessed on individuals who fail to file their tax returns. When it comes to issuing penalties, the IRS doesn’t discern unlawfully detained citizens from those unscrupulous individuals avoiding taxes, as there’s no pause or postpone option available while wrongfully detained.
Per 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 won’t exceed 25% of unpaid taxes. After that period, a failure to pay penalty will continue until the tax is paid, up to a maximum of 25% of the unpaid tax, plus interest.
In a statement on the matter to Fox News, the 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 heart-wrenching and unconscionable situations” and is “fully prepared to work with affected tax filers and their families—as well as Congress—to provide the maximum penalty relief and any other appropriate accommodation available under federal law.”
Assessing taxes on these individuals in the first place seems unfair and like a slap in the face, but, unfortunately, it’s not the first time it’s happened, as a growing number of Americans are being wrongfully detained by hostile government regimes. According to a 2023 Wall Street Journal article, Washington Post correspondent Jason Rezaian, released from Iran in 2016 after 544 days of wrongful imprisonment, came home to a $200,000 tax bill for unpaid taxes. He stated that while the IRS was apologetic over his tax bill, he was only able to have the agency reduce the amount he owed to around $6,000, stating that “[w]hile the agency has some discretion to waive penalties, it doesn’t have the legal authority to forgive taxes or interest on the basis that the filer has been wrongfully detained.”
Proposed Legislation
After hearing about Rezaian’s ordeal, U.S. Sen. Mike Rounds (R-S.D.) co-sponsored a new proposed bill, the “Stop Tax Penalties on American Hostages Act,” that would amend the Internal Revenue Code to prevent the IRS from imposing penalties on wrongful detainees and hostages who miss payments while they’re held abroad. The bill passed with bipartisan support in the Senate but now remains in limbo while it awaits to pass in the House.
Available Relief
In the meantime, “whether you’re an astronaut stuck 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 deals with complex IRS penalty abatement request cases.
“Pursuant to Internal Revenue Manual (IRM) Section 20.1.1.3.2.2.1, entitled ‘Death, Serious Illness, or Unavoidable Absence,’ reasonable cause, the gold standard of IRS penalty relief, may be granted for filing, paying or depositing taxes late due to an unavoidable absence if tax compliance responsibilities are attended to within a reasonable period of time after return from the unavoidable absence,” he added
Michael Karlin, founding partner at Karlin & Peebles, LLP in Los Angeles, also opined that “most of these penalties are subject to reasonable cause defenses, and I would think that being wrongfully (or even rightfully) imprisoned in a foreign country would qualify.” Karlin said while people who pay tax through employee withholding don’t have to pay estimated taxes, in a case where there could be additions to tax for late or non-payment of estimated taxes, there’s an exception under IRC Section 6664(2) that seems to fit the three detainees’ circumstances: “to the extent the [IRS] determines that by reason of casualty, disaster, or other unusual circumstances the imposition of such addition to tax would be against equity and good conscience.”
“Interest is not waivable, so if anyone were behind on their taxes, they would owe interest,” Karlin said.
Lastly, he added, “If any of these people had foreign bank accounts that were required to be reported to FinCEN on a Report of Foreign Bank and Financial Accounts” (FBAR), there’s also a reasonable cause defense for penalties related to failures to file FBARs.”
In case you’re wondering, the two astronauts currently stranded in space aren’t safe from the tax man either. The IRS doesn’t consider international airspace, international waters or outer space as abroad for tax purposes, meaning that they’re still responsible for filing their U.S. taxes on time. Luckily, unlike most detainees, astronauts stuck on a mission can usually communicate and may be able to file (or request an accountant to file) for an extension from space.
