Questions? Feedback? powered by Olark live chat software

Expats & International Travelers: Your U.S. Passport Could Be Canceled if You Fail to Pay Taxes & Owe the IRS

unpaid payroll taxes
Court Bars Disbarred Lawyer from Engaging in Tax Preparation
November 23, 2015
foreign financial institution
Another Foreign Financial Institution Enters the Swiss Bank Program to Obtain a Non-Prosecution Agreement
November 24, 2015

Expats & International Travelers: Your U.S. Passport Could Be Canceled if You Fail to Pay Taxes & Owe the IRS

passport cancelation

Some people view the ability to travel internationally as a fundamental, Constitutionally protected right that should not be abridged expect when there is no other option. However. Others do not hold international travel in nearly the same regard and believe that a passport is a privilege rather than a right. Regardless as to how one conceives one’s right to travel, the lack of a passport can cause significant issues for an individual and typically results in the inability to travel freely. For many individuals who travel internationally extensively for business or personal reasons, the loss of their passport could result in extensive difficulties and embarrassment.

Unfortunately it appears that Congress is poised to pass a law that would result in the loss of passports for U.S. taxpayers with serious tax deficiencies.  The law in question is, perhaps surprisingly, a highway funding bill. Nevertheless, it appears that a provision in the bill would indeed result in passport revocation or non-renewal for Americans with large tax deficiencies. If the bill passes, it could go into effect as soon as January 2016.

When Would a Taxpayer Lose His or Her U.S. Passport for Unpaid Taxes?

It is important to note that as of this writing the bill has not yet passed, but most observes do expect the provision to pass as part of a highway spending bill in the upcoming days and weeks. In any case, this measure represents the latest escalation in the IRS and U.S. government’s approach to tax enforcement. Here, even if taxpayers file properly and engage in good-faith efforts to address their tax obligations, they can still find themselves without a passport and unable to travel. If the current version of the bill passes, under new section 7345 of the U.S. Tax Code titled Revocation or Denial of Passport in Case of Certain Tax Delinquencies, an individual can lose his or her passport simply for having a tax debt.

Under language in the provision, taxpayers with “seriously delinquent” tax debts will face enforcement consequences. “Seriously delinquent” tax debts appears to mean any tax debt that is in excess of $50,000. The $50,000 is inclusive of all fines, interests, and penalties. As most tax practitioners can attest, $50,000 is not an extreme or inordinate amount of money for a tax controversy. Consider that the penalty for failing to file FATCA could equal 50 % to 100% of your highest account balance. If you have an undisclosed foreign account with a large balance, you could theoretically pass this limit through only a single act on noncompliance. Taxpayers who have failed to pay income tax for multiple years and have incurred significant penalties are also likely to surpass this threshold.

How Will Tax Enforcement through Passports Work?

While there is still uncertainty regarding the exact mechanisms that will trigger an enforcement action against your passport, it appears that this enforcement action – like most others – will be triggered by the IRS’s filing of a tax lien against you.  Tax liens can be filed by the IRS once the IRS has assessed the tax liability, provided notice of the debt and a demand for the liability, and the taxpayer fails to make timely payment within 10 days. It is expected that the IRS will compile a list of taxpayers owing at least $50,000 in unpaid taxes. The IRS will submit this list to the State Department. The State Department will then refrain from renewing passports of those with significant tax debts. The State Department may even revoke the existing passports of those with tax debts.

This could result in serious complications for many U.S. taxpayers. Consider that many U.S. expats are already struggling under the administrative burden imposed by FATCA and other offshore account disclosure laws. An expat who loses his or her passport will be placed in an incredibly precarious position with no clear good solution. Furthermore, any person who depends on international travel for some or all of their income could face significant difficulties due to this provision. In any case, due to the well-established U.S. right to both domestic and international travel, it is highly likely that this measure will be challenged on Constitutional grounds.

Experienced International Tax Attorneys Handle Offshore & All Tax Filings

American expatriates and international travelers should remain informed about this new law. For some individuals with unpaid tax debts, there is a potential for harsh consequences including the loss of your passport and ability to travel outside of the U.S. The experienced tax lawyers of the Tax Law Offices of David W. Klasing can address these concerns and work to mitigate the consequences of any tax enforcement action taken against the taxpayer. To schedule a reduced-rate consultation at our Los Angeles, San Diego or Irvine law offices call 800-681-1295 today or contact us online.