TaxConnections


 

Tax Debt And Passport Revocation: The New Weapon Against Americans Abroad



John-Richardson- Tax Debt and Passport Revocation

US Passport application links Citizenship (State Dept) to Taxation (Treasury) to enforce “Taxation based Citizenship

The logical progression continues …

I just got off the phone with someone who has just received a letter from the IRS stating that:

1. He had a “seriously delinquent” tax debt; and

2. That notice of the “seriously delinquent” tax debt was being forwarded to the State Department.

(In 2016 I did a presentation on this topic just a few months after the law came into force. You may view the presentation here.)

It is clear that the letters from the IRS have started to go out. The purpose of this post is to explain in simple terms what this means for Americans abroad.

To put it simply:

1. If you have received the notice and you do NOT have a current U.S. passport then:

The State Department cannot issue you a passport.

2. If you have received the notice and you DO have a current U.S. passport then:

The State Department may revoke your passport but is not required to revoke your passport.

For most Americans abroad (who certainly have a valid U.S. passport unless they are dual citizens) receipt of the letter does NOT mean that they will lose their existing U.S. passport.

Like all aspects of living as a U.S. citizen abroad, this issue will be governed by both the IRS and by the State Department.

It began with Sec. 3201 of the FAST Act (which naturally is a revenue offset provision and one of the final gifts from the Obama administration) …

Like most of life as a U.S. citizen, it all starts with the IRS …

Internal Revenue Code Sec. 7345 provides the mechanism to certify the “seriously delinquent tax debt” and then forward notice of the debt to the State Department. The relevant language is:

If the Secretary receives certification by the Commissioner of Internal Revenue that an individual has a seriously delinquent tax debt, the Secretary shall transmit such certification to the Secretary of State for action with respect to denial, revocation, or limitation of a passport pursuant to section 32101 of the FAST Act.

You can read how the IRS interprets this provision here:

https://www.irs.gov/businesses/small-businesses-self-employed/revocation-or-denial-of-passport-in-case-of-certain-unpaid-taxes

Once the State Department receives the “certification” it will respond with “denial, revocation, or limitation” …

According to the State Department:

Passports and Seriously Delinquent Tax Debt
If you have been certified to the Department of State by the Secretary of the Treasury as having a seriously delinquent tax debt, you cannot be issued a U.S. passport and your current U.S. passport may be revoked.

If you are overseas you may be eligible for a limited passport good for direct return to the United States.

We would suggest that if you have seriously delinquent tax debt, you contact the IRS to resolve your debt before applying for a passport. If you do not resolve your tax issues before applying for a passport, your application will be delayed or denied.

If you have seriously delinquent tax debt and have already applied for a new U.S. passport, we cannot issue a new passport to you until you have resolved your tax issues with the Internal Revenue Service (IRS).

For more information on seriously delinquent tax debt, see Revocation or Denial of Passport in Case of Certain Unpaid Taxes on the Internal Revenue Service (IRS) website.

So, where in the legislation and regulations does all this come from?

Denial: Denial is mandatory when one applies for renewal or for a new passport.

https://www.law.cornell.edu/cfr/text/22/51.60

§ 51.60 Denial and restriction of passports.
(a) The Department may not issue a passport, except a passport for direct return to the United States, in any case in which the Department determines or is informed by competent authority that:

(3) The applicant is certified by the Secretary of the Treasury as having a seriously delinquent tax debt as described in 26 U.S.C. 7345.

Revocation: Revocation is permitted but is not mandatory

https://www.law.cornell.edu/cfr/text/22/51.62

§ 51.62 Revocation or limitation of passports.
(a) The Department may revoke or limit a passport when

(1) The bearer of the passport may be denied a passport under 22 CFR 51.60 or 51.61; or 51.28; or any other provision contained in this part; or,

It is not clear when the State Department would revoke an existing passport. I am not sure what incentive the State Department has to revoke an existing passport (just because of a tax debt).

My thoughts on this …

1. The $50,000 “tax debt” includes interest and penalties. It’s easy for an American abroad to exceed this simply through “form transgressions”.

2. The people most threatened by this are those who do not have a second passport. Get yourself a second passport.

The days of living as a U.S. citizen outside the United States are clearly numbered.

The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a dual citizen. I am a lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

I am also a member of the American Citizens Abroad Professional Tax Advisory Council (PTAC). This is an advisory panel focused on assisting American Citizens Abroad in an FBAR and FATCA world.

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.

One thought on “Tax Debt And Passport Revocation: The New Weapon Against Americans Abroad

  1. Nononymous says:

    Minor clarification: The days of living as a U.S. citizen ONLY outside the United States are clearly numbered.

    With a second citizenship, passport revocation is not an existential threat and US tax compliance is not necessary.* The only concern for a dual citizen living outside the US is banking discrimination for those with a US birthplace living in a country where FATCA enforcement is taken seriously (e.g. Switzerland, but certainly not Canada).

    Note that the victim in the case discussed above would likely not be receiving an IRS letter threatening passport denial if he or she had not been compliant to begin with.

    *Caveat: duals can be vulnerable in edge cases involving non-citizens resident in countries with collection assistance agreements. For example, a UK-US dual living in Canada could face IRS bills via CRA because only Canadian citizens are protected by the tax treaty from US collection.

Leave a Reply

Meet Tax Experts At TaxConnections...