Many of my readers already know that one’s US passport is in serious jeopardy if a taxpayer has what is called “seriously delinquent tax debt”. First, some brief background on the law and how it particularly affects Americans living and working overseas. I’ll then provide the latest statistics on the passport enforcement efforts since the Internal Revenue Service (IRS) certification program began in earnest earlier this year.
Internal Revenue Code Section 7345 authorizes the IRS to certify to the State Department that a taxpayer has “seriously delinquent tax debt”. Once the State Department receives certification of the tax debt from the IRS it will not issue or renew the individual’s US passport, and in fact, it may also revoke the passport. In the case of passport revocation, the State Department may limit the passport to return travel to the US (thus preventing the individual from being trapped in limbo if he or she is already outside of the country).
Having a “seriously delinquent tax debt” generally means that the taxpayer has an outstanding IRS tax bill in which (i) the IRS is owed more than $51,000 in back taxes, penalties and interest AND (ii) the IRS has filed a Notice of Federal Tax Lien and the period to challenge it has expired, or the IRS has issued a levy with regard to the tax debt.
Americans Abroad at Greater Risk
Now that foreign financial institutions are sending detailed financial information to the IRS pursuant to the “Foreign Account Tax Compliance Act” (the infamous “FATCA”), the IRS will have more and more information to determine whether a taxpayer might owe US taxes. This is a more common problem for US persons living overseas. For this group, maintaining foreign financial accounts is a normal and necessary part of everyday life abroad. However, if the relevant US tax filings are not up to date, or do not reflect the foreign assets, the IRS may come calling.
In this regard, if tax returns have not been filed or have not properly been including income, the IRS can prepare a tax return based on the information it has available. This is called a “Substitute for Return” (“SFR”) and it can be a dangerous thing. The IRS uses the SFR in order to assess the amount of tax owed, to calculate applicable penalties and interest and to move forward with the collection process. Because the IRS will prepare the SFR without utilizing any deductions or exemptions that could otherwise have been taken by the taxpayer (for example, the foreign earned income exclusion for US persons living abroad), the threshold of more than $51,000 in “seriously delinquent tax debt” can very easily be reached.
There are several ways taxpayers can avoid having the IRS notify the State Department of their seriously delinquent tax debt. They include, for example, paying the tax debt in full, or paying timely under an approved installment agreement, or under an accepted offer in compromise. Furthermore certain taxpayers will not risk loss of their passport, including a taxpayer who is in bankruptcy, or who has been identified by the IRS as a victim of tax-related identity theft or whose account the IRS has determined is currently not collectible due to hardship. Greater detail on the IRS passport revocation program, the various exceptions etc. can be found at my earlier US tax blog post “IRS On a Roll with Passport Denials and Revocations – $51,000 Covered!”
Statistics – IRS Certifications Gaining Momentum!
According to the Taxpayer Assistance Service (TAS) latest report, the IRS began by certifying “seriously delinquent” tax debt for only about 1,500 taxpayers in February. By May 4, 2018, however, it had certified 9,356 taxpayers. The TAS Report states that the IRS will increase certification by five to ten percent each week until it certifies all taxpayers meeting the criteria. After that, certifications will occur systemically on a weekly basis. Although the number of taxpayers eligible for certification fluctuates, as of April 2018 there were approximately 436,400 taxpayers who met certification criteria and did not meet a discretionary or statutory exclusion.
Statistics – IRS Raking in the Money
IRS Division Commissioner Mary Beth Murphy said in late June that at the moment, the US authorities are denying passports rather than revoking them. Thus, right now many tax debtors with current passports should still be able to travel, but they won’t be able to renew their passports. “Seriously delinquent” tax debtors who do not have a passport will be denied them if they apply.
If the IRS had hands, I can just see it rubbing its palms together in delight at the effect of the new enforcement rules! Ms. Murphy said that one tax debtor paid $1 million to avoid passport denial. According to an IRS spokesman, by the end of June, 220 people had paid over $11.5 million to settle their tax debts in full, while another 1,400 had signed installment agreements.
TAS has voiced serious concerns that the notice IRS sends to taxpayers regarding the passport certification program is woefully inadequate and does not fully advise taxpayers of their rights. Losing one’s passport is a very serious matter and TAS continues working with the IRS to ensure its plans and procedures support the purpose of the statute and protects taxpayers.
Before It’s Too Late – A Simple Fix
Those who are learning they have not been in compliance with their US tax obligations (be it filing of tax returns or the notorious FBARs) may have a relatively painless solution to their tax woes in the IRS Streamlined Offshore Procedures. You can learn more about these procedures here. Don’t become a statistic. Contact me if you need help in regaining US tax compliance and avoid the headaches of a possible loss of your US passport.
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