There is a lot of misinformation on the internet nowadays on this topic. While overseas Americans must be careful not to fall prey to, what I consider, unscrupulous advisors that liberally employ certain scare tactics, neither must such Americans be complacent with their tax situation. It is clear that the Internal Revenue Service and Congress have set their sights on United States persons living and working abroad because the potential for tax evasion is greater with offshore assets and accounts. Here’s the scoop about unresolved tax liabilities and what they can mean for the American living abroad.
Federal Tax Lien
Taxpayers living overseas are often misinformed or often conveniently forget about their US tax obligations. Many do not enter the US for years and are blissfully unaware that the IRS has taken action against them for unpaid tax liabilities that have been formally assessed. This action often takes the form of the filing of a Federal Tax Lien. The Lien is filed with a county government and is usually filed in the place where the taxpayer had lived or conducted business. For taxpayers overseas, the Lien is usually filed in Washington DC. The Lien attaches to the taxpayer’s real and personal property and if that property is sold while a lien is in effect, the IRS will obtain payment of the taxes due from the sales proceeds before the taxpayer is paid.
Once the IRS files a Tax Lien, it becomes a matter of public record. Credit reporting agencies regularly gather this type of information, and the Federal Tax Lien will then become part of the taxpayer’s credit history. A Federal Tax Lien can adversely impact your credit score and you may encounter difficulty in obtaining new credit or refinancing existing credit.
Undoubtedly, damage can be done to one’s reputation and credit history once a Lien is filed. It is best to avoid imposition of the Lien in the first place.
How to Avoid Imposition of Federal Tax Lien
Avoiding imposition of a Lien can be very difficult to do if the IRS does not know how to contact you but believes you owe tax dollars. If you cannot be contacted you will fall into the category of overseas taxpayers labeled “addressee unknown”. Unfortunately, many taxpayers moving abroad fall into this category when the taking of a very simple action can easily prevent it!
What should you do?
Notify IRS of Your New Address
If you have moved overseas, make sure to notify the IRS and the relevant State tax authorities of your new contact information. The IRS has a special form, Form 8822, for notifying it of a change of address .
The IRS has a special site page devoted to the topic of address changes.
The State tax authorities might not have a special form, and taxpayers should call the relevant Department of Revenue to find out precisely what they are required to do to effectuate a change of address.
All communications with US or State tax authorities should be documented and copies of any correspondence and proof of mailing should be retained.
What Should You Do if You Learn that a Federal Tax Lien Has Been Filed?
You should contact the IRS to learn all of the facts. You may need professional assistance to resolve the problem. Once the matter is resolved, and the IRS agrees to release the Tax Lien, it will nonetheless remain on a taxpayer’s credit report as “released” for a period up to seven years. A taxpayer must request that the IRS also withdraw the filed Notice of Federal Tax Lien in order for the IRS to remove the public notice. This is not done automatically. A special Form must be submitted to the IRS to request that the Tax Lien Notice be withdrawn. See Form 12277.
A taxpayer must request in writing that the IRS notify other interested parties of the withdrawal notice. One must provide the names and addresses of the credit reporting agencies, financial institutions or other creditors who should be notified.
If You Do Not Resolve Your US Tax Matters, What Can Happen?
The IRS has procedures in place to assist it in collection of delinquent taxes from taxpayers who are residing overseas. If you have an unpaid tax liability and the IRS has filed a Federal Tax Lien, the IRS may submit your identifying taxpayer information to the Treasury Enforcement Communications System (“TECS”).
TECS is a database maintained by the Department of Homeland Security. It is used extensively by the law enforcement community and contains information about individuals and businesses suspected of, or involved in, violations of federal law. TECS can provide useful information about taxpayers so the IRS can attempt taxpayer contact or learn information about the location of assets. TECS allows the Department of Homeland Security to identify taxpayers with unpaid tax assessments who are traveling into the United States. It has been reported that such taxpayers are now more frequently being detained at the US entry border.
The general section of the Internal Revenue Manual (IRM) governs the process. Click here (See §126.96.36.199)
Possible Detention at United States Border
As mentioned, it is not uncommon that the IRS has been unable to contact a taxpayer because it lacks a valid/current address. This can more easily happen when the taxpayer has left the US to live overseas. The taxpayer may be completely unaware of an assessed but unpaid US tax liability until going through US Homeland Security checkpoints and being detained. Under current procedures, if a taxpayer has an outstanding tax debt owing, but cannot be located, the IRS can alert Homeland Security officials to question the individual as he enters the US. Generally the officials will seek to ascertain what assets the taxpayer has in the United States, the duration of the trip, where the taxpayer is travelling to, where he will be staying, and similar information. The information would then be passed on to the IRS so it can make contact with the taxpayer. Nonetheless, absent a warrant, there is no authority for Homeland Security to arrest a taxpayer under such circumstances.
Once a taxpayer’s information has been entered into TECS, a lengthy process may ensue to actually get that information removed! This means that detention at the US border may occur even after the tax matter has been remedied. A withdrawal or release of the lien, along with certain other formalities is required for removal of the taxpayer’s information from TECS. The time lag means detention at the border is likely for a certain time period after the IRS has withdrawn or released a lien.
Can the State Department Deny Issuance of A US Passport For Unpaid Taxes?
Generally, you cannot be denied a passport merely because you owe back taxes. However, you can be denied a passport if your tax matters have escalated. The State Department may refuse to issue a passport if any of the following apply: the taxpayer is subject to a subpoena and the IRS has commenced court or grand jury proceedings against the taxpayer; the IRS has filed criminal felony charges against the taxpayer; there is an outstanding federal arrest warrant issued against the individual for the commission of a tax-related felony; or the taxpayer is on parole or out on bond. Merely owing back taxes on its own does not rise to the level of having committed a crime, nor does it mean that an arrest warrant has automatically been issued.
Once the passport issuance is denied with regard to the tax matter, you must generally pay the back taxes and other amounts owed such as interest and penalties in order to have the denial lifted. The IRS must drop its case and officially notify the State Department that the passport denial is no longer in effect.
If you are in possession of a valid passport, and your application for a new one would be denied under any of the aforementioned circumstances, you can continue to use the old passport. However, the IRS can request that the State Department revoke the passport. Generally, the State Department may revoke or limit a passport when any of the circumstances exist that could result in denial of the issuance of a passport, as set out previously. The rules regarding the denial and restriction of US passports are found in 22 CFR 51.60.
Using the US Passport to Collect Unpaid Taxes
The IRS is very aware of the potential for using the US passport as an effective means of increasing the collection of unpaid US taxes. The Government Accountability Office (GAO) issued a report to Congress on this very matter. It noted that a significant amount of unpaid federal taxes owed by individuals who were issued a US passport within the past four years had been outstanding for several years. The report urged that Congress consider legislation using the US passport as an enforcement tool in helping generate substantial collections of unpaid federal taxes and to increase tax compliance. The GAO Report can be accessed here (Gov’t Accountability Office Report of March 2011).
Don’t Be Complacent! IRS and State Department Are Linked and Proposals Have Been Made to Deny Issuance or Revoke US Passport for Tax Debts
Currently, the citizenship functions of the US Department of State are separate and very distinct from the revenue functions of the US Department of the Treasury and the IRS. We are seeing a continuous erosion of this separation of functions, however. For example, the US passport renewal form mandates that the applicant supply his Social Security Number (SSN) if he has one. This is authorized by Internal Revenue Code Section 6039E, enacted in 1986. The legislative history to that section makes clear that over 25 years ago Congress was aware that US persons residing overseas were not filing US tax returns even though required to do so. Congress intended to increase tax compliance of US citizens living outside the United States through its enactment of this tax provision. A $500 penalty applies for failure of a passport applicant to provide the SSN, unless reasonable cause can be established. In addition, the State Department MUST turn over to the IRS some damning information from the application – the statute mandates that it must provide your SSN and foreign residence information to the Department of Treasury. If you refuse to submit the SSN, the State Department MUST still provide your identifying information to the IRS indicating you have refused to give the information. So, you lose either way – whether you reveal your SSN on the passport form or refuse to do so, the IRS will be made aware of you and can commence its investigation into your tax compliance history. While we do not know precisely what the IRS will do with this information, it does not take much imagination to think that any US person with a passport will now automatically appear on the IRS radar screen. Given the growing trend of international tax enforcement, it is possible that US citizens who have not been tax compliant may face travel or passport difficulties.
In a similar vein, in March 2013, Senator Reid introduced a proposal that would allow the IRS to instruct the State Department to cancel, or not renew, or not issue a US passport to any individual who owes more than $50,000 in taxes to the US Treasury. Even though the proposal was not ultimately adopted, it had been approved by the Senate in April 2013 and may indicate a future trend. It is clear that the tax compliance burden for overseas Americans (and those State-side who travel extensively) will not be easing up in the near future. It really is the time to become tax compliant without any further delay!