Do you plan to travel abroad but your passport is about to expire? And, you owe the IRS? Or, may be you are one of the American expats that hasn’t filed a tax return since you moved abroad? Well, embrace yourself for some unpleasant surprises like a passport denial or revocation. On December 3rd , 2015, Congress passed the FAST (Fixing America’s Surface Transportation) Act and it was signed into law by President Obama the following day. The consequences of this new law can be worse for many Americans than FATCA. Found inside of the FAST Act are two important tax provisions that will make any American who is dependent on their passport worried.
IRS debt, Passport Denial and Traveling Abroad
FAST Act Tax Provisions, IRS Debt and Passport Application
In accordance with the first tax provision found in the FAST Act, the United States Secretary of State is lawfully permitted to deny a passport, or the renewal of one, to any taxpayer who has been identified by the Internal Revenue Service (IRS) as seriously delinquent in their tax obligation. The Secretary of State is also permitted to revoke the passport of these same individuals. The IRS considers a serious delinquent tax debt to be one that is in excess of $50,000, indexed for inflation, and including any interest and penalties.
The second tax provision allows for the State Department to deny an application for a passport to any individual who fails to provide their social security number (SSN) or provides a SSN that is incorrect or invalid. This applies whether the incorrect SSN was provided willfully, intentionally, recklessly or negligently.
In order to protect your right to freedom of movement outside of the United States, American taxpayers overseas, domestic taxpayers and non-citizen spouses of Americans should take the following steps:
File US tax return, FBARs and all informational expat tax returns to avoid Passport Revocation
Don’t assume that just because you are a US taxpayer living outside of the country or have a non-US based income or assets that preparing your yearly tax return will be easy. Also, don’t assume that just any tax preparer is going to know how to help you file this type of expat tax return.
If you are receiving any of the following, understand that your tax return is considered to be complicated:
- an income of more than $100,000 annually in a foreign country
- foreign bank account balances that exceed $10,000
- any foreign financial assets over $50,000
- a spouse who is not a US citizen
- a foreign pension
- expatriate benefits received from an employer
- non-US investment funds
- ownership of a foreign entity
- signatory or other authority over a foreign financial account
- foreign inheritance
- stock options
- foreign life insurance
- a mortgage in a foreign currency
- the sale or rental of real estate which is outside of the US
- income derived from self-employment outside of the US.
Each one of these listed items has the potential to cause a significant IRS debt or penalties above $50,000 if reported incorrectly, before the statute of limitations expires on your tax returns or FBARs. Any taxpayer facing one or more of these issues will find it beneficial to seek professional assistance from a tax preparer who has a deep understanding of tax regulations, especially in terms of foreign derived income and policies.
It is also important that the appropriate tax forms and foreign bank account forms be filed accurately and on time, and you have the right to expect the highest standards from the accounting firm you choose when it comes to this. If there is any doubt at all about the competence and expertise of your tax preparer, do not hesitate to seek out a second opinion. Ideally, this would be a firm that specializes in US taxes for your exact circumstance, such as a small business owner, a taxpayer resident in a foreign country, a corporate executive, etc.
Definition of Seriously Delinquent IRS Debt and Passport Revocation
You may be wondering why with all of the financial and tax complexities of living abroad, US expatriates don’t just move back home. According to Charles M. Bruce, an American attorney living and working in Switzerland, this bill infringes on the rights of Americans who have chosen to live abroad:
“The revocation or denial of passport provision in this bill is exactly the kind of tax legislation that drives Americans overseas crazy. It’s attached to a huge bill mainly dealing with a subject totally unrelated to the one affecting them. There were never any hearings at which they could present their views. No one seems to know who pushed for this legislation.”
Bruce, who also advises an expat group American Citizens Abroad, also added; “No one seemed willing to take into account the fact that communications from the IRS to taxpayers living abroad sometimes go astray. Also, the ability for these taxpayers to resolve a collections matter, which has never been easy, has been made harder by the closure of IRS foreign offices.”
US expats rely on their passports as a means to travel from one country to another, as an identification document in their foreign country of residence, and to be able to legally enter and leave the US. Giving the State Department the ability to revoke a passport due to a certification from the IRS, whose record of not making mistakes is far from clear, has the potential to break apart families for long periods of time. It could also prevent individuals from being able to return to work, travel for necessary medical services, and inflict financial hardship in terms of extra professional fees and travel expenses as the taxpayer works to resolve the issue.
Thankfully, a Congressional Conference Committee, influenced by the bipartisan congressional Americans Abroad Caucus and groups such as American Citizens Abroad, were able to insert a “mechanism for the IRS to correct errors and to take into account actions by a taxpayer trying to come into compliance” before the act was passed according to Mr. Bruce.
Bruce also explains that “the meaning of ‘seriously delinquent tax debt’ is spelled out a bit more. Among other things, the text clarifies a seriously delinquent tax debt to permit revocation of a passport only after the IRS has followed its examination and collection procedures under current law and the taxpayer’s administrative and judicial rights have been exhausted or lapsed.”
The Conference Committee’s notes also define situations where the IRS commissioner should reverse the taxpayer’s status as being delinquent, giving them thirty days to implement the reversal once the taxpayer has come into compliance or has begun the proper steps required to absolve their tax debt.
For the US taxpayer living overseas, the most important notes from this conference are that you need to be notified of any debts you have with the IRS, that you still have considerable rights, and that if you do get into trouble, a knowledgeable lawyer or tax accountant should be able to help you in setting things right with the IRS. Of course, the best recourse would be not to allow your situation to reach this point.
History of Congress Developments and Passport Renewal
Americans that would like to learn more about earlier Congress developments, please read below.
In 2012 a report was issued by the Government Accountability Office regarding the prospective of passport issuance being denied if any taxes were owed by the applicant. The goal of this step is similar to the requirement that before you can register your vehicle or renewing your driver’s license, any outstanding parking tickets must be paid.
The referent here is for passport issuance to be restricted, which will prevent traveling abroad when you owe the IRS, more specifically for those that owe large amounts. Several proposals have been offered before Congress, yet none has been passed yet. The beginning of this proposed movement was the submitted by Sen. Harry Reid (D-Nev.) in 2012 and aimed at those owing the IRS $50,000 more.
Since then, there has been a multitude of amendments filed such as those by Ranking Member of the Senate Finance Committee, U.S. Senator Orrin Hatch (R-Utah). Some of those amendments targeted causes such as Economic Growth Act 2012, the Highway Investment and Job Creation bills, all of which have been submitted to the Committee for consideration. Other amendments that have been submitted for consideration can be found here.
Hatch Amendment #1 : New revenue provisions within the Chairman’s mark include a transfer from the LUST (Leaking Underground Storage Tank) Fund and closing the black liquor loophole. Also included is the “gas guzzler” tax and the withdrawal of passports for anyone that owes $50,000 or more in back taxes. The Chairman’s mark also includes increasing the levy authority for any Medicare providers that have delinquent taxes and transferring specific imported tariffs to the Highway Trust Fund.
These efforts converted into Senate Bill 1813, which was introduced by Senator Barbara Boxer (D-CA). For the most part, the focus is highway safety, but the underlying focus was to give the federal government authority to stop Americans with the IRS debt from leaving the country. One recommendation presented is for the State Department to be allowed to deny, limit or revoke passports of any person that the IRS can certify owes $50,000 or more in tax.
The no-passport, no-travel plan isn’t law yet. However, with more politicians backing the idea, such as Sen. Ron Wyden (D-Ore.) did in 2014, it is getting closer and closer to becoming a law. The proposal before the Committee states that in the case of an emergency, even with a tax debt, you’ll be allowed to travel. You’ll also be allowed travel if your trip is for humanitarian reasons.
However, critics have said that it isn’t limited to any criminal tax cases or if the government has a concern that the traveler is evading a tax debt. So, as the bill is presented now, passports can be revoked if the IRS files a lien for tax debt of $50,000 or more.
It isn’t hard to acquire a $50,000 tax debt these days and tax liens are fairly common. When you owe the IRS, a tax lien is their way of telling your creditors, they’ll be first in line to get paid. In this regard, the no-travel suggestion may seem overboard to some. And yet, others are claiming this no-travel proposal as unconstitutional.
Perhaps the IRS needs as much help as it can get when it comes to collecting back taxes. There is a fear of possible glitches causing administrative nightmares by many. If this proposed Highway Bill passes, the code would have a new section 7345 added called “Revocation or Denial of Passport in Case of Certain Tax Delinquencies”.
Section 7345: Denial or Revocation of Passport with Certain Tax Delinquencies
In general, if the IRS Commissioner submits a certification to the Secretary for an individual with delinquent tax debt of $50,000 or more, the certification will be transmitted by the Secretary to the Secretary of State. At that point, passport denial, revocation or limitation will be set in accordance with section 4 of An Act To Regulate The Issue and Validity of Passports, which was approved as 22 U.S.C. 211a et seq. on July 3, 1926, aka the Passport Act of 1926.
(b) Seriously delinquent tax debt
In this section, seriously delinquent tax debt is in regards to outstanding debt which has a lien filed against it under this title had is a matter of public records pursuant to section 6323. It is also in regards to a notice of levy being filed pursuant to section 6331 with exception that the following is not included in such term:
- a debt is timely paid pursuant to an agreement under section 6159 or 7122, and
(2) the collection of a debt is suspended for due process hearing pursuant to section 6330, or relief under subsection (b), (c), or (f) of section 6015, has been requested or may be pending.
(c) Adjustment for inflation
In the case of a calendar year started after 2012, the amount stated in subsection (a) will increase by an amount equal to—
such dollar amount then multiplied by
Adjustment for the cost-of-living as determined for the calendar year under section 1(f)(3), which will be determined by replacing calendar year 2011 for calendar year 1992 in subparagraph (B) thereof.
If the adjusted amount under the above statement is not a multiple of $1,000, the that such amount will be rounded up to the next highest multiple of $1,000.
Keep in mind that tax liens are practically automatic and all of a person’s property is covered by IRS tax liens, including those things acquired after filing of the tax lien. Tax liens are used by the courts making the IRS debt a priority in bankruptcy proceedings or real estate sales. A Notice of Federal Tax Lien can be filed by the IRS after:
- Liability has been assessed by the IRS;
- A Notice and Demand for Payment is issued by the IRS that states amount owed; and
- Failure to pay in full within 10 days.
It is possible that a mistake is made in a tax lien. However, in most situations the IRS does not make mistakes. On a rare occasion that the IRS does make a mistake, the taxpayer simply needs to gather their records to straighten the matter out.
Do you need help with US expat tax issues and the IRS?
If you have more questions about your passport renewal, the expat tax accountants at Artio Partners will be pleased to assist with audit, IRS assessments and various expat tax questions.