IRS Publishes New Notice Explaining Passport Revocation Rule For Unpaid Taxes

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!

Mr. Moss is a Tax partner in a boutique U.S. tax firm specializing in the areas of international taxation and expatriate taxation. The practice focuses on servicing U.S. individuals and small business located outside the U.S. with their U.S. and international tax matters and includes both tax planning as well as annual tax compliance (tax return preparation). He has extensive experience with filing delinquent returns under the IRS Streamlined procedure, FBARs, FATCA reporting (Form 8938), reporting interests in foreign corporations (Form 5471) and partnerships (Form 8865) as well as foreign trust reporting (Form 3520 and Form 3520/A). He works very closely with clients utilizing the various international tax treaties in order to maximize benefits through smart tax planning. Previously he held a senior position in the international tax practice of Ernst & Young. He is an attorney licensed in the State of New York.

2 thoughts on “IRS Publishes New Notice Explaining Passport Revocation Rule For Unpaid Taxes

  1. Nononymous says:

    Has the US government given any thought to how this might impact US citizens living overseas, particularly those who have spent their entire lives outside the US and have never been tax compliant?

    For dual citizens, losing the US passport isn’t a big problem, but for those with only one citizenship it could be the end of their residence permits and force them to return to the US and face uncertain futures.

    This law should only come into effect if the US joins the rest of the civilized world and stops attempting to tax its non-resident citizens.

  2. The likely effect of this law will be to encourage Americans living abroad to aggressively seek a second citizenship.

    Those who have never filed U.S. taxes in an interesting position. Those not in the system have the comfort of not having any assessed tax debts. What about the following situation:

    A U.S. citizen who grew up outside the USA who may or may not have a second citizenship. This individual has had a successful business. He/she has carried on business through a corporation in his country of residence. IT is a controlled corporation with retained earnings going back to 1986. He learns about his “noncompliance” and is told by a tax professional that the IRC Sec 965 transition tax applies to him and that the cost of compliance will be 20% of his net worth. Furthermore, there is no way that he can pay the tax debt.

    What would/should he do? Is this an incentive to come into U.S. tax compliance?

    No, of course the US Government has NOT given any thought to Americans abroad.

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