What is a “Sailing Permit”?
A Certificate of Compliance, or “Sailing Permit,” is a tax form that a foreign (non-US) individual must file with the IRS to demonstrate that he/she has paid all applicable U.S. taxes before departing the United States. The purpose of the “sailing permit” is to establish whether a departing foreign national owes any tax dollars to the US government before he leaves the country. Foreign executives and professionals working temporarily in the US can potentially be a large source of revenue for the US’ ailing fisc. The envisioned procedure was set to be easily administered. Prior to departure, the foreigner was to report to an IRS office and submit a preliminary tax computation, as well as pay the amounts due. The person would obtain a receipt (the “sailing permit”) that was to be given to an IRS agent upon physical departure from the US.
Exemptions from Sailing Permit Rules
Certain persons are exempt from the “sailing permit” rules:
Category 1. Representative of foreign government with diplomatic passports, members of their household, and servants accompanying them.
Category 2. Employees of international organizations and foreign government (other than those exempt under category 1) and members of their households.
Category 3. Alien students, industrial trainees, and exchange visitors, including their spouses and children, who enter on an F-1, F-2, H-3, H-4, J-1, J-2, or Q visa.
Category 4. Alien students, including their spouses and children, who enter on an M-1 or M-2 visa.
Category 5. Certain other aliens temporarily in the United States who have received no taxable income during the tax year up to and including the date of departure or during the preceding tax year.
Category 6. Alien residents of Canada or Mexico who frequently commute between that country and the United States for employment.
All green card holders and nonresidents with non-immigrant status other than the aforementioned individuals must procure the Certificate of Compliance from the IRS before departing the US.
Except when a bond is furnished, or the IRS is satisfied that departure will not jeopardize the collection of income tax (e.g., the person can demonstrate that he will be returning to the US and his departure is merely temporary), the individual will be required to pay all tax shown as due on the Form 1040-C at the time of filing. Taxes due for past years must also be paid. If the tax computation on Form 1040-C results in an overpayment, no tax need be paid at the time of filing, but IRS cannot provide a refund at the time of departure. If a refund is due, the individual must file a tax return (e.g., Form 1040) to claim it at the end of the tax year.
See IRS Publication 519 for more details
Sailing Permit Not Being Enforced Now or in the Past
The requirement for obtaining a sailing permit commenced in 1921, but research indicates that the IRS does not monitor or actively enforce compliance with this statutory requirement even though departing foreign nationals can owe significant tax dollars to the US government for services they have performed in the US. The law establishing the “sailing permit” requirement, as well as its legislative history, do not indicate how the requirement is to be enforced.
While a few reports of agents asking for sailing permits at departure have surfaced, the IRS has admitted that it is unable to identify from its own records foreign individuals who did not file Forms 1040C and related Form 1040NR or 1040. The IRS needs outside information, such as information from the Department of Homeland Security or the State Department, to determine the extent of noncompliance among departing foreign persons. Neither Homeland Security nor the Customs Department, are required to check departing foreigners for the sailing permit, despite their strong presence at the border, so currently the sailing permit lacks any real “bite”.
What’s In the Future?
Recently, the US has become more focused in its collection of taxes from resident and nonresident alien taxpayers. If enforcement of the sailing permit was undertaken, it is certainly another method through which the IRS could step up its efforts of foreign person’s US tax compliance. One tax professional has written to the House Ways and Means Committee very recently pointing out that the sailing permit should be enforced and that the tax revenues garnered from it could be greatly increased.
What can happen if you don’t have a sailing permit and are stopped at the border? From a tax perspective, simply not having the permit does not mean you owe any tax. However, from a legal standpoint, you can be denied exit. It may be a matter of time before not being able to present a sailing permit can cause problems for the foreign national trying to leave the USA.
This article was contributed by Virginia La Torre Jeker, J.D., a US tax attorney in Dubai, UAE. It (or, a version of it) was originally posted on her US tax blog.