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Happy New Year!– Lose Your US Passport for Unpaid Taxes As Of January 1, 2016

Just yesterday, President Obama signed into law controversial tax provisions of the so-called highway funding bill which provides five years of funding for highways and other transportation infrastructure. You can track how the law progressed, here.

The two tax provisions were included in this highway funding bill to help raise necessary revenue to help pay for the required infrastructure.  The funding includes two provisions: One, discussed in this post, would allow the United States Department of State to decline to issue a passport or to revoke the passport of certain long-term tax delinquents who owe more than $50,000 in tax debts. The law also resurrects an earlier program authorizing the IRS to hire private debt collection agencies to pursue tax debtors.  The new law will have an obvious severe impact on the 6 to 8 million Americans residing overseas who rely so heavily on their US passports.

The text of the law can be found here.  See “SEC. 32101. Revocation or denial of passport in case of certain unpaid taxes”. It would only apply to individuals against whom the IRS has filed a lien or levy and who have not yet worked out a repayment plan to satisfy the tax debt. Limited exceptions exist for a taxpayer who is actively disputing his case (e.g., collection due process hearing) or who needs to travel for emergency or humanitarian purposes.

In addition, the State Department is authorized to deny the issuance of a passport if it receives a passport application that “does not include the social security account number issued to that individual, or includes an incorrect or invalid social security number willfully, intentionally, negligently, or recklessly provided by such individual.”

It’s quite clear that the noose is tightening and tightening very quickly. The new law will have an effective date of January 1, 2016.

This Idea Has Been Brewing for  Awhile

By way of background, the idea to use a passport as leverage to compel payment of taxes, has cropped up again and again in the past several years.  

The IRS was very aware of the potential for using the US passport as an effective means of increasing the collection of unpaid US taxes. The Government Accountability Office (GAO) issued a report to Congress on this very matter. It noted that a significant amount of  unpaid federal taxes owed by individuals who were issued a US passport within the past four years had been outstanding for several years. The report urged that Congress consider legislation using the US passport as an enforcement tool in helping generate substantial collections of unpaid federal taxes and to increase tax compliance.  The GAO Report, Gov’t Accountability Office Report of March 2011, can be accessed here.

In January of 2012,  the IRS issued a “notice of proposed rulemaking” regarding information reporting required of all US passport applicants. The proposed rules required four items of passport application data to be passed on by the Department of State to the IRS – full name; addresses; taxpayer identification number and date of birth. The IRS may impose a $500 penalty amount on any passport applicant who fails to provide the required information.  Currently, we do not know what the IRS may do with this information, but it does not take much imagination to think that any US person with a passport will now automatically appear on the IRS radar screen.  Aside from these proposed rules it should be noted that although issuance of a passport does not require a social security number or taxpayer identification number, a passport applicant is required under current law (Internal Revenue Code Section 6039E) to provide the number on his application. Failure to provide the number is to be reported by the State Department to the IRS and may result in a $500 fine.

In a similar vein, in March of 2012, Senator Reid introduced a proposal that would allow the IRS to instruct the State Department to cancel, or not renew, or not issue a US passport to any individual who owes more than $50,000 in taxes to the US Treasury. The Senate approved it in April 2012 as part of an amendment to an earlier bill (the “Surface Transportation Extension Act of 2012″, Part II), but it was later dropped before the House and Senate versions of the bill were eventually passed. 

Again in 2014, the “passport-as-leverage-to-collect-delinquent-taxes” reared its head. In 2014, with the 113th Congress, the Joint Committee on Taxation Chairman’s Mark for the 2014 Highway Bill, the “Preserving America’s Transit and Highways Act of 2014” contained the same provisions as earlier for “seriously delinquent tax debt.” The proposal was eventually eliminated.   

Warnings Ignored

The American Citizens Abroad (ACA) had warned of the extremely harsh consequences this provision would have on US individuals living and working abroad – such as inability to travel, open bank accounts, apply for loans and a host of everyday other things requiring a passport.  

According to the ACA, the new rule had not been the subject of a hearing allowing affected taxpayers and groups advocating for them to provide testimony and many relevant governmental agencies were not consulted.  In addition, as noted by ACA, this law comes at a time when the IRS’, including Collections’, ability to render services to taxpayers overseas and, in effect, help them “work out” their collection problems, are severely reduced. Many IRS offices overseas have now been closed due to funding cuts to the agency. The ability of revenue officers in Collections to meet with taxpayers outside the US, as a practical matter, is non-existent. Furthermore, there are well-known problems with IRS communications sent to taxpayers overseas such that taxpayers never receive communications from the IRS about possible tax assessments or delinquencies.

Time to Take Action

Given the growing trend of international tax enforcement, it is abundantly clear that US citizens who have not been tax compliant will face serious travel and passport difficulties.  While the trigger is a delinquent tax debt of $50,000, it’s not that hard to owe $50,000 since penalties and interest can add up very quickly.  Compounding this problem is that people faced with a huge tax bill often feel  overwhelmed and ignore the problem for some time. Furthermore, tax penalties for Americans overseas can often be higher than for domestic taxpayers given the foreign asset information reporting that typically applies more  often to the US individual residing abroad who would have foreign financial assets such as interests in foreign entities or foreign financial accounts.

The law is here and will be here to stay. It’s definitely time to become tax compliant!

Watch this Space

The current rules regarding the denial and restriction of US passports are found in  22 CFR 51.60. Watch that space for amendments taking into account the new rules slated to be effective January 1 2016. Happy New Year, folks!

You can test your knowledge of the new law by taking a quiz here.

Follow me on Twitter: @VLJeker

 

 

 


2 thoughts on “Happy New Year!– Lose Your US Passport for Unpaid Taxes As Of January 1, 2016

  1. This may generate fees for our firm but nevertheless I think this is a harsh and inhumane way to raise revenue for the country. I am sure the US government thinks that the past 6 or 7 years of well-publicized enforcement efforts against both US individuals and foreign banks means that any US citizen residing abroad is by now well aware of their US income tax obligations. I believe they are wrong as to that fact, but I doubt they are open to being educated. Also, this is wrong-headed since the biggest impact is likely to be larger scale expatriation which is bad for many reasons.

    1. HI Richard – Thank you for your comment. It is reassuring to hear a prominent attorney with a top firm espousing this view, which echoes my own. My concern is for the toxic cocktail on the way. It’s comprised of some or all of the following ingredients: overseas Americans who don’t understand the tax impact of many foreign investments (think foreign mutual funds and PFIC; CFC and Subpart F inclusions etc.), overseas Americans who don’t understand they need to file US tax returns even though they pay tax in a foreign country or fall below FEIE thresholds, FATCA reporting of US owned foreign accounts, abominable mail service / non-delivery of mail in many foreign countries (you know, the letter from IRS stating you have a tax deficiency or that it’s slapped on a nice fat lien ….), expats who move from country to country every few years and don’t notify IRS of the address changes…. Makes for a deadly mix the ultimate result of which might be revocation of the US citizen’s passport.

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