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.
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