Travelers would be wise to include their tax and immigration legal teams on speed-dial. Beginning in February 2018, the Internal Revenue Service began sending certifications of unpaid tax debt to the State Department in order for them to eliminate the ability of Americans to travel outside of the United States if the IRS computer shows they owe taxes.
Jan. 1, 2016 marked a new era for Americans living abroad, as the ‘‘Fixing America’s Surface Transportation Act’’ became effective. The FAST Act authorized the denial of a passport application or the revocation of a current passport where the individual has more than $50,000 (indexed for inflation) of unpaid federal taxes.
This unprecedented coordination between the IRS and the State Department Customs allows the IRS to instruct the State Department to revoke a current passport or deny a passport application as a result of an alleged tax obligation. This level of cooperation is expected to cause additional (and serious) issues for those affected travelers.
During this summer, significant batches of certifications were reported by the IRS (an IRS spokesperson indicated that the number was 362,000 when speaking with The Wall Street Journal) and the State Department began it efforts, initially focusing on denying applications of new or renewed passports.
Disproportionately Harmful to Americans Living Abroad
Americans living and working abroad depend on their passports for traveling, conducting financial transactions and identification. Naturally, having this important piece of documentation revoked suddenly could cause substantial harm and distress.
Imagine an American businessman who relocated himself and his family 3 years ago in order to work in Germany. He travels to New York for a quick business trip. Upon arrival at JFK, he is informed that his U.S. passport has been revoked because he allegedly has a “seriously delinquent tax debt.” The customs official confiscates his passport and refuses to give it back. Our American businessman will not be able to go back to Germany to visit his children until he has cleared up his tax situation.
Under the authority of the FAST Act, the U.S. government can keep this businessman’s passport until he pays the full amount of tax owed or until he can prove that he doesn’t owe this amount in a federal district court or the Tax Court. This quick business trip could quickly turn into an extended travel nightmare, subjecting this unsuspecting traveler to financial, social and professional harm. The resolution of the dispute could take weeks, months or years.
IRS guidance acknowledges the issue but says only that if you need your U.S. passport to keep your job, you must fully pay the balance or make other payment arrangements to keep or reacquire your passport.
Expats Are Unaware of Their U.S. Tax Filing Requirements
The U.S. taxes its citizens on their worldwide income. Americans, at home or abroad, must report their foreign financial assets each year or face criminal penalties and a host of draconian civil penalties. This can be particularly confusing for Americans living abroad, as most countries impose tax based on residence, not citizenship. Accordingly, Americans abroad can be ill-advised by well-meaning accountants within their country of residence as to their U.S. reporting and tax obligations.
U.S. taxpayers who have moved to a high tax jurisdiction, such as the United Kingdom, Australia or Canada and who file and pay the requisite tax in those jurisdictions, can find themselves in the crosshairs of the FAST Act. Calculating whether a taxpayer has a “seriously delinquent tax debt” of over $50,000 (indexed for inflation) could be computed initially without taking into account applicable deductions or foreign tax credits available for foreign income tax paid to their country of residence (non-U.S.). Such a taxpayer could find themselves holding a revoked passport, despite the fact that they would not have owed any tax to the U.S. government had they properly filed U.S. tax returns.
The issue is further complicated for U.S. taxpayers living abroad because these taxpayers likely will not learn of their U.S. tax obligations until they travel to the U.S. (or other related jurisdiction) and their passport is confiscated. While the FAST Act and the new IRS guidance require that taxpayers be notified of their deficiency in person or by mail to their last known address of record, many people who move abroad don’t tend to update their address with the IRS or maintain a mailing address in the U.S., so they may never receive notice of their growing tax deficiency. Others may honestly believe that their foreign tax obligation negates any and all U.S. tax and reporting responsibilities, and as a result those taxpayers may ignore the FAST Act notifications.
These two factors, namely the use of a “gross” tax liability standard and imperfect notification standards, make it all the more likely that an unsuspecting traveler, who would have owed nothing had he filed U.S. tax returns or been able to respond to an initial IRS notice, ends up learning of his amassing tax liability only when his U.S. passport is stripped from him, leaving him stranded and unprepared for an extended stay in the U.S. or abroad, if necessary. Such an individual is left with few options and little recourse. The taxpayer must either: (1) wire money to the IRS if they have access to liquid assets, (2) arrange an installment agreement to pay the tax owed over a course of time, or (3) stay in the U.S. and litigate whether the IRS assessment is correct. In the first two options, the Secretary of State is not required to reissue a passport for up to 30 days after payment of the tax due or up to 30 days after entering into an installment agreement to pay the tax due. As one can imagine, under the third option, litigating one’s tax debt takes significantly longer than 30 days.
People are expected to pay for their own room and board, as well as any legal fees incurred, during these stressful months of the unexpected stay. The FAST Act specifically includes a “hold harmless” provision, which prevents a taxpayer from looking to the U.S. government to recover any of these unexpected and incidental costs and consequences. So, even if the revocation of the passport was invalid under the FAST Act, the stranded U.S. taxpayer has no recourse to recover expenses.
Finding Yourself Stuck in a Foreign Country or in the United States
The FAST Act contains a provision that states that if the Secretary of State decides to revoke a passport, that passport may be made valid ONLY for return travel to the U.S. This Act also allows the Secretary of State to issue a limited-use passport that acts as a one-way, one-time passport for return travel to the U.S.
Consider a U.S. citizen business woman living in Australian who wanted to travel on her U.S. passport from Australia to China. She may find herself unable to return to Australia with a revoked passport. Her only prospect of further travel may be a one-way trip back to the U.S. to resolve her purported tax liability. Other than the clear physical and monetary hardship she faces if she is sufficiently well advised to have her counsel work with the State Department to acquire the limited validity passport (or can do so on her own, without advice from China) to return to the U.S. in order to defend herself; she also faces having to defend an audit while her paperwork is in Australia and she’s not personally able to retrieve any of it.
The FAST Act essentially allows the U.S. government to trap and hold U.S. citizens with alleged unpaid taxes in excess of $51,000 within the borders of the U.S., providing them with no means of escape and subjecting them to material and excessive financial burdens in order to resolve their plight.
Customs as a New Collection Agency for the IRS
The passport revocation provisions of the FAST Act are estimated to raise $398 million over the next 10 years. While this is a handsome sum from the perspective of the IRS, this number represents only a fraction of the aggregate financial, social and professional harm that will be spread among countless Americans, both domestically and abroad.
Based on current guidance, we can believe that the IRS intends to squeeze everything it can out of these cases. To the end, the IRS has published guidance that it will not even reverse certification because the taxpayer pays the debt below $50,000.
From the first few months of collections, the IRS is already reporting a great degree of success. IRS Division Commissioner Mary Beth was reported by The Wall Street Journal to have said that one debtor in particular had paid $1 million in tax debts specifically to avoid passport denial, while another IRS spokesperson told WSJ that some 220 people had handed over $11.5 million to repay their full debts as of late June 2018, while 1,400 others had set up payment plans to reduce their debts.
What to Do
Now more than ever, Americans, especially those living abroad, must ensure that they’re in compliance with their U.S. tax and filing obligations so as to avoid the unfair treatment of the FAST Act. Americans living abroad who aren’t in compliance with their U.S. tax and filing obligations, especially those with plans to travel back to the U.S., should contact a competent tax professional to consider addressing their filing deficiencies as soon as possible to avoid the potential loss of their passports, as well a myriad of costly civil and criminal penalties. Several options exist to correct filing deficiencies. A competent tax attorney can analyze the facts and circumstances facing a particular taxpayer and choose the appropriate course of action to achieve the best outcome and to avoid the pitfalls for the unwary.
The IRS is required to notify you in writing at the time the IRS certifies seriously delinquent tax debt to the State Department by sending you a Notice called a CP508C. The IRS will send the written notice by regular mail to the taxpayers last known address. Ensure the IRS has your clients’ current address by filing an address update form. Note that the IRS has recently announced that it has decided that a U.S.-based power of attorney will not receive a copy of a client’s CP508C. Given the extreme delays in receiving mail sent by ordinary post across an ocean, clients may wish to take a more active role in monitoring their accounts.
Even if your client thinks they’re fully compliant, Americans living abroad should also consider ordering copies of their account transcripts from the IRS periodically. Although the IRS offers an online system for ordering transcripts, this system was recently hacked with some 500,000 taxpayer’s information stolen. Accordingly, it may be best to request such information the “old fashioned way” via a phone call to the IRS or by mail order. The account transcript will show the balance the IRS thinks your client owes. Also, having a U.S.-based professional linked to the account is still helpful. Even though a power of attorney holder will not receive notification of the CP508C, he should receive copies of the tax notices that the IRS is required to send leading up to the CP508C.
Stay organized (or get organized). In order to best help clients in such a circumstance, maintain a detailed tax file for the last 7 years or more, containing full bank statements for every account they hold abroad and all items of income, gain, deduction or loss. If they bank at banks that will not provide convenient monthly statements, encourage them to change banks.
Consider getting a second opinion on tax and reporting filings. Because international reporting and tax has been in constant flux over the last few years, even the most diligent and careful accountant can have made a mistake, particularly if they’re operating under a “same-as-last-year” approach in order to try their best to minimize client accounting fees. Often a second set of eyes, it may even be within the same accounting or law firm, might identify items that should be corrected in advance of any difficulties.
In the meantime, clients should still keep their immigration lawyer’s number on speed dial.