Written on behalf of Feigenbaum Consulting
The IRS has begun to enforce a law passed by Congress in late 2015, which permits the State Department to revoke or deny passports to Americans who have significant tax arrears. More than 360,000 Americans who owe taxes are set to be affected.
Where an American has significantly delinquent tax debt (more than $51,000), IRC § 7345 authorizes the IRS to certify that debt to the State Department for action. The State Department is then required to deny passports or revoke them for these taxpayers. Americans who are overseas when their passport is revoked will receive a limited validity passport good only for direct return to the U.S.
The IRS began sending certifications of unpaid tax debt to the State Department this past February.
Who Is at Risk?
Taxpayers who are at risk are those who have more than $51,000 in tax arrears (including assessed tax, penalties, and interest). This amount does not include “Fbar penalties” (i.e. penalties for or reporting foreign financial accounts).
For passport denial, a debtor must generally be subject to a lien (advising creditors of an IRS debt) or a levy (granting the IRS the authority to seize assets).
The IRS is required to notify any taxpayer whose debt is certified with the State Department. It will send written notice, by mail, to your last known address. The notification will warn the debtor that his or her passport will not be issued or renewed until their debt is resolved.
If the debtor subsequently applies for a passport, the State Department will hold that application open for 90 days, allowing for a resolution period. If the issues are not resolved during that window of time, the taxpayer will have to reapply for a passport.
Who Is Not at Risk?
Taxpayers who will not be subject to passport restrictions will be those who:
- are contesting an IRS assessment (either administratively or in court);
- have pending or current installment-payment agreements or offers-in-compromise with the IRS;
- are victims of identity theft;
- have requested “innocent-spouse” relief;
- have debts in “not-collectible” hardship status;
- are in bankruptcy;
- live in a federally declared disaster area;
- are serving in a combat zone.
How Many Americans Have Been Affected So Far?
An IRS spokesman told The Wall Street Journal that 362,000 current tax debtors will be affected by the law. Their names are being forwarded in batches to the State Department, and the IRS hopes to be done by the end of this year. A State Department spokesperson has confirmed that some passports have already been denied.
IRS Division Commissioner Mary Beth Murphy noted that passports are currently being denied rather than revoked, so debtors with current passports should be able to travel abroad for now, but will eventually be denied renewal when those passports expire.
Murphy notes that the enforcement has already had an effect- one tax debtor paid $1 million in arrears to avoid passport denial. As of June, 220 taxpayers had paid more than $11.5 million, and 1,400 other taxpayers had signed installment agreements.
Reactions to the Enforcement
Nina Olson, the National Taxpayer Advocate, is critical of some of the IRS’ newly launched procedures, noting that tax debtors and the IRS are notified concurrently when the tax debtor is qualified for passport denial. She notes that this is not often enough time to resolve tax issues.
Instead of the current procedures, she proposes that the IRS should warn affected taxpayers 30 days before the IRS forwards their names to the IRS. This would be a similar timeline to that provided by the Department of Health and Human Services where someone is denied a passport because of $2,500 or more in unpaid child support. Olson also suggests that the State Department’s letter to taxpayers should outline all emergency and humanitarian exceptions.
We will continue to follow developments in this matter and will provide updates as they become available. In the meantime, if you have questions about personal tax planning, contact Feigenbaum Law. Accountants and lawyers in both the US and Canada routinely seek us out for assistance with complicated tax compliance issues. We also have significant experience in the administration and litigation of tax matters in the US and Canada. As always, our services are confidential and customized to meet your situation.