Dayle O Blair | IRS revoking American citizens’ passports for tax debt
On Monday, January 22, 2018, the much-anticipated and long-awaited passport certification to the United States Department of State (DOS) began for seriously delinquent taxpayers.
The tax laws of the United States authorised the world's largest collection agency, known as the Internal Revenue Service (IRS), to certify seriously delinquent taxpayers to the DOS for the purposes of denial, revocation and limitation of their passports.
What is a seriously delinquent debt?
A seriously delinquent tax debt is when a person owes the IRS more than US$51,000 in tax liabilities, inclusive of principal, penalties, interest and surcharges, and such persons have received a notice from the IRS that a federal tax lien has been filed or a levy has been issued by the agency.
It should be noted that you could owe the IRS more than $51,000 without knowledge of this debt, because of failure to notify the IRS when you change your address, as all IRS communications go to your last address on record.
You must file Form 8822 and update your address with the IRS when you are moving. Also, where you fail to file your returns, the IRS enables what is known as a Substitute for Return to estimate your tax liability, thus creating serious tax debt without your knowledge.
Such a situation can arise when financial institutions such as credit cards companies write off debts, and notify the IRS of such write-offs. These amounts are considered as income to the taxpayer by the IRS, thereby creating an obligation to the taxpayer.
If such amount is not included on the return as income, the IRS will create a tax liability without your knowledge of it. Also, liabilities are created without taxpayers' knowledge when foreign financial institutions report Foreign Account Tax Compliance Act (FATCA) information directly to the IRS and the taxpayers fail to file tax returns.
The effect of the certification
With more than 136 million holders of American passport, this law could affect a vast number of people. When a debt has been certified, it simply means that an American passport holder could be returning from a vacation in a foreign country, and upon arrival at the airport that person may be denied boarding the aircraft because his or her passport has been revoked.
Nonetheless, the IRS is lenient and approachable and will entertain payment arrangements, and after which will release the revocation, limitation or hold on the passport.
IS the American passport still an asset to have?
As of January 19, 2018, holders of a United States passport could travel to 174 countries and territories without a travel visa, or with visa upon arrival. Additionally, the United States passport was ranked 4th worldwide in terms of travel freedom, according to the Henley Passport Index.
However, with the FATCA and Reports of Foreign Bank and Financial Accounts (FBAR) laws and recent developments in American international tax laws - for those with income and investments outside the USA - the obligations may have become too burdensome for some Americans to comply with.
As a result, many American citizens are renouncing their citizenship and surrendering their passports. In 2016, just over 5,400 Americans renounced their citizenship, and that has been the highest number ever in one year. In 2017, that number trended down slightly to 5,133.
While renouncing may appear to be an attractive way to avoid the American tax burden, there is a downside as the fee to renounce is US$2,350, and if you have assets of over US$2 million it will be treated as if you have sold such assets, and capital gains tax will be applied against it, allowing the Government to collect almost a quarter of the value in taxes.
You may also renounce your citizenship if you are tax complaint, i.e., your last five tax returns must be certified, and you may also do so if your tax liabilities for the last five years are more than US$162,000.
The Facebook co-founder Eduardo Saverin, pop star Tina Turner, and socialite-songwriter Denise Rich are some of the powerful who have cut their US tax liabilities by renouncing their US citizenship.
It should, however, be noted that if you renounce your citizenship you face the possibility of being denied a visa to visit the United States, as a visitor's visa is discretionary.
What about green card holders?
Green card holders may give them up for tax purposes, particularly if they are a long-term card holder. For example, if you have held the green card for eight of the last 15 years, the same tax implication will be applicable as stated above for passport holders.
At a tax conference in Las Vegas in October 2017, the IRS revenue officer in charge of collection was asked if the passport law would affect green card holders and the answer was no. But he could not say for how long this would remain in place.
The IRS works closely with the Department of Homeland Security through the Treasury Enforcement and Communication System (TECS).
This is a computerised information system designed to identify individuals and businesses suspected of, or involved in, violation of Federal laws.
TECS database can track the movement of taxpayers, especially green card holders living overseas, and delinquents with tax obligations to Uncle Sam.
This simply means that green card holders returning from abroad could turn up at the Miami International Airport and the customs officer greets them with a surprise, that they have a tax liability to be dealt with, and that the IRS wants to talk to them.
The inclusion of a person on the delinquent list provided to TECH arises from the filing by the IRS of a Notice of Federal Tax Lien on the taxpayer's assets and accounts based on the revenue laws.
Taxpayers who currently reside outside of the US may not even know that the IRS has issued a Notice of Federal Tax Lien. This usually happens because such taxpayers have failed to provide the IRS with their current address, as stated above.
Taxpayers should act immediately and decisively as delay is danger, and should seek competent tax advice from qualified US professionals to comply with their tax obligations. The IRS has said the new focus for 2018 will be on international compliance.
According to the IRS, it will reassign its best resources from other areas to international compliance, because it has made significant financial gains by targeting non-compliant international taxpayers.
- Dayle O. Blair is a United States tax attorney, a certified public accountant, and an international tax consultant. He may be reached on firstname.lastname@example.org, or email@example.com or (876)-625-5403 or (876)-906-1016