We’ve written previously about the newly-enacted Code Section 7345 of the Internal Revenue Code, which authorizes the denial, revocation, or limiting of a delinquent taxpayer’s U.S. passport. We’ve noted that the statutory language contained in the new law offers few details about how exactly the penalty will be administered and to what extent exceptions would apply.
The IRS has since provided some additional details relating to the passport revocation rule on its website, but more formal guidance was expected to further flesh out the revocation penalty.
After some delay, the IRS has issued new Notice 2018-1, which provides more information on how the penalty is to be implemented.
The Passport Revocation Rule
Under the passport revocation rule, taxpayers with a “seriously delinquent tax debt” of $50,000 or more (which is to be adjusted for inflation) may have their passports denied, revoked, or otherwise limited. The law defines a seriously delinquent tax debt as one for which the IRS has already filed a notice of lien or notice of levy. Thus, for instance, if a taxpayer is in the process of contesting an IRS tax bill, such taxpayer should not yet be considered seriously delinquent.
It’s important to note that the $50,000 minimum debt amount includes interest and penalties. In this regard, if you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. With this in mind, it may not be very difficult for late taxpayers to cross the $50,000 threshold rather quickly.
The IRS is required to notify taxpayers in writing at the time the IRS certifies seriously delinquent tax debt to the State Department. The State Department is also required to notify you in writing if your U.S. passport application is denied or your U.S. passport is revoked.
Exceptions To The Rule
The IRS describes a number of exceptions to the passport revocation rules, including certain types of debt which will not be included in determining whether a taxpayer has seriously delinquent tax debt. Exceptions include tax debt that is:
- Being paid in a timely manner under an installment agreement entered into with the IRS
- Being paid in a timely manner under an offer in compromise accepted by the IRS or a settlement agreement entered into with the Justice Department
- For which a collection due process hearing is timely requested in connection with a levy to collect the debt
- For which collection has been suspended because a request for innocent spouse relief under Code Section 6015 has been made
New Notice 2018-1
Notice 2018-1 clarifies that if an exception to the passport revocation rule applies, then the State Department will not be notified that the taxpayer has a seriously delinquent tax debt.
The IRS will be in contact with the State Department, however, in the event that circumstances change (for instance, the taxpayer pays his delinquent tax debt) such that the IRS decision to revoke the passport has been reversed. The reversal notification to the State Department is to be made as soon as practicable after the determination.
The notice clarifies that before denying a passport, the State Department will hold a taxpayer’s application for 90 days to allow the taxpayer to resolve any erroneous certification issues, make full payment of the tax debt, or enter into a satisfactory payment alternative, such as an offer in compromise, with the IRS.
The Takeaway For US Expats
If you have failed to file or pay your taxes, it is best to come clean with the IRS as soon as possible to avoid a number of potential penalties, including the cancellation of your U.S. passport. A number of options are now available for delinquent taxpayers, including several IRS amnesty programs.
Popular among these programs are the Streamlined Procedures, which we have helped a number of clients take full advantage of in order to become compliant without paying penalties. Our experts at Expat Tax Professionals are available to help discuss your options and assist you with becoming tax compliant with the IRS.
Have a question? Contact Ephraim Moss.
Your comments are always welcome!