Previously, we discussed a 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 noted then 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.
After more than a year-long delay, the IRS finally provided a number of important additional details relating to the passport revocation rule on its website.
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.
New Rule Details
On its website, the IRS first notes that it has not yet started certifying information about the tax debt of U.S. taxpayers to the State Department, the government body tasked with handling passports. However, it adds that the information will be passed on to the IRS at some point in 2017.
The IRS then offers some relief to taxpayers by stating that if a US person’s passport application is denied or a passport is revoked while the US person is overseas, the State Department may issue a limited validity passport good only for direct return to the US.
The IRS also 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
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 with the IRS.
The IRS is required to notify taxpayers in writing at the time the IRS certifies seriously delinquent tax debt to the State Department. The IRS is also required to notify you in writing at the time it reverses certification. 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.
If you need your U.S. passport to keep your job, once your seriously delinquent tax debt is certified to the State Department, the IRS will allow you must fully pay the balance, or make an alternative payment arrangement to have your certification reversed.
Once you’ve resolved your tax delinquency with the IRS, the IRS will reverse the certification within 30 days of resolution of the issue and provide notification to the State Department as soon as practical.
The Takeaway From U.S. Expats
If you have failed to file or pay your taxes, it is best to come clean with the IRS and avoid potentially severe penalties, including the cancellation of your U.S. passport in the near future. A number of options are now available for delinquent taxpayers, including several IRS amnesty programs.
5 comments on “IRS Releases More Details On Passport Revocation Rule”
I have been traveling the world for 15 years outside of the USA. I’ve done primarily bar work getting paid under the table. I am afraid to fly home for the holidays because I’m afraid they will revoke my passport. Do you have any thoughts on this? I haven’t filed in 15 years. And haven’t had a bill in my name in the US for 15 years. Safe to go home?
The passport revocation provisions disproportionately affect Americans who live overseas. These people pay taxes where they live and rarely owe much in actual tax on their US return. Many have not filed US returns for years or decades as it seemed pointless to pay high compliance costs to show a zero balance due. However, the penalties for failure to file information returns, which have skyrocketed over the past 15-20 years, can easily generate a significant tax debt if those penalties were assessed by the IRS.
The last paragraph of this article implies that the IRS will revoke your passport “soon” if you don’t come into compliance quickly. This is hyperbole designed to frighten people into compliance. A passport can be revoked only after the IRS has certified a seriously delinquent tax debt. For those who have not been in compliance, the IRS must first determine that you owe taxes and attempt to collect. So far, this has not happened to anyone living overseas who is not already “in the system”. In any event, passport revocation won’t come out of the blue – there are processes the IRS must go through to attempt collection before the debt becomes seriously delinquent. That paragraph is there to scare people into compliance by overstating the reach of the IRS and by making it seem as though coming into compliance is almost a trivial exercise. For those US expats who have set up their financial plans and investments without any regard to US law (because they had no idea they were required to pay US tax, or didn’t understand how xenophobic the US tax code really is), coming into compliance is not trivial – even without penalties, the costs can be enormous. Any decision on whether to comply with US law under these circumstances should consider all costs and risks. Renunciation of US citizenship is skyrocketing precisely because those who try to comply correctly find that it is very difficult to save or invest while simultaneously being tax compliant under two different sets of tax law. Many of those who have come into compliance under the current “amnesty” programs have felt forced to renounce in order to have a normal financial life in their current home.
There is no one more compassionate to the US citizens being affected by the FATCA laws that were poorly written. All of your personal stories are very important to us and we want to continue to hear them so we can work together to bring about the necessary changes. Your voices are very important to solving these complex problems.
Over the past few years as we have been covering these important issues on FATCA. We have encountered a few who just want to put down an entire industry of tax professionals who work with integrity to uphold the tax laws of our country. There are many tax laws that require changes in this country and TaxConnections is a forum to discuss solutions while demonstrating decorum.
If you want to be represented to Congress to change FATCA tax laws, please allow me to help you by leading you to this link that shows you how to get the attention of Congress and deal with them with decorum:
https://www.taxconnections.com/contacting-members-of-congress-dos-and-do-nots
You are best represented to Congress by being professional at all times. As the CEO of TaxConnections, my job is make you heard as a professional. For some reason, there are those who think they know more than an entire tax industry who is working hard to help you.
Having said that, I reserve the right to ensure that people behave professionally on our blogs. This means we do not have room for people who want to put down our community of tax professionals who work so hard to help taxpayers. We want intelligent people who demonstrate their professionalism with real life stories to educate our audience. In this way, we can make a real difference and get the attention of the tax experts who are trying to help and the lawmakers to understand the unintended and unfair conditions they have created that have led to hardships for many.
Please read the link if you want to deal with Congress. If your representative is not following theses rules I suggest you avoid them.
Karen (in her comment above) correctly points out that:
“Renunciation of US citizenship is skyrocketing precisely because those who try to comply correctly find that it is very difficult to save or invest while simultaneously being tax compliant under two different sets of tax law. Many of those who have come into compliance under the current “amnesty” programs have felt forced to renounce in order to have a normal financial life in their current home.”
Well stated. For Americans with a lifetime of living outside the United States, coming into U.S. tax compliance, is the first step to renunciation. They just don’t know it at the time they come into compliance. Once in compliance, many will learn that compliance is very difficult to maintain. It’s very unfair that for Americans abroad:
For many Americans abroad, to comply with the laws of America means that they can no longer be an American.
Thank you Karen and John for what you wrote. It validates what I convey to Americans overseas: there are MANY instances where it’s best to not enter or re-enter the US tax system. Each case must be weighted on its own merits in concer with resident country laws which can protect legal residents and most particularly its citizens from the US government (e.g. iRS). Therefore, breathe and think first. Don’t let fear be your guide as an American overseas.
Keith REDMOND
American Overseas Global Advocate
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