This article applies to US citizens, US nationals and their employers, the latter to ensure US Federal tax compliance. “Seriously Delinquent” tax debts can cause suspension, denial, or nonrenewal of US Passports.
The US passport is said to be one of the most powerful in the world. Its holders enjoy visa-free access or visa-on-arrival access to almost 200 countries. For an American who lives overseas, the US passport is even more important as it may be the only valid proof of identification in the host country. Furthermore, a US passport may be the only acceptable ID document when entering into any legal transactions, such as signing a lease agreement or an employment contract or opening a bank account.
However, what if this powerful passport were rendered useless, revoked or refused renewal due to tax compliance issues?
On Dec. 4, 2015, former President Barack Obama signed into law the Fixing America’s Surface Transportation (FAST) Act. The Act provides funds for Federal highways, highway safety and transit programs, and related needs. To help cover the costs involved, it added a new Internal Revenue Code (IRC) section (Section 7345) that allows the Internal Revenue Service (IRS) to work with the State Department to revoke, deny, or limit the passport of any taxpayer with a “seriously delinquent tax debt.”
This procedure has raised an estimated $1 billion so far — considerably more than the anticipated $400 million. Given this level of success, we can expect the IRS to continue using passport suspensions, denials, and non-renewals to motivate taxpayers to settle tax compliance issues.
WHO ARE THE FAST ACT’S TARGETS?
The operative phrase here is “seriously delinquent tax debt.” Under the Act and the IRS’s implementing guidelines, this refers to an individual’s unpaid, legally enforceable Federal tax liability of at least $52,000, including interest and penalties, as formally assessed by the IRS. Also, IRS must have already filed a notice of lien, issued a levy on the taxpayer’s assets, or the taxpayer must have either exhausted administrative appeal rights or allowed them to lapse.
So, when is a tax debt not considered seriously delinquent? The FAST Act clarifies that debts that are being paid in a timely manner in accordance with an IRS-approved offer in compromise or installment agreement are not considered seriously delinquent. Tax cases for which a due process hearing has been filed or is pending or that are subject to a claim that can result in a zero balance are also not included. IRS rules also have certain compassionate provisions that exempt taxpayers who have filed for innocent spouse relief or for personnel who are currently serving in a combat zone.
IRS rules also allow for discretionary exemption (which means IRS may or may not allow an exemption) in cases involving financial hardship or identity theft, for taxpayers in federally-designated disaster zones, bankrupt individuals, or for deceased taxpayers.
WHAT HAPPENS IF A TAXPAYER’S PASSPORT IS AT RISK?
If the taxpayer’s debt is seriously delinquent and none of the exceptions or discretionary exclusions apply, the IRS will send a certification that the taxpayer’s passport is subject to suspension or non-renewal to the Treasury Secretary who then forwards that certification to the Secretary of State. Concurrently, the IRS will notify the taxpayer of this action at his or her last known address.
To contest a certification, a taxpayer may file suit in a US district court or the US Tax court.
Given the expense and time involved in litigation, a recent IRS Notice may provide a more attractive option for taxpayers who act fast. If the State Department receives a passport application from a certified delinquent taxpayer, it will now inform the taxpayer and hold the application for 90 calendar days instead of immediately rejecting it. This provides time for the taxpayer to contact the IRS and request a decertification by convincing the IRS that the certification is in error, by settling the tax liabilities in full, or by entering into an offer in compromise or installment payment agreement with the IRS.
Affected taxpayers should bear in mind that the $52,000 threshold for 2019 is not difficult to breach. Under the general statute of limitations for federal taxes, the IRS usually has just three years from the due date of a return or, if later, from the actual filing date to assess additional taxes. However, this limit becomes six years in cases where there is a substantial understatement of income (i.e., omission of over 25% of gross income). The statute is unlimited in cases where the understatement is fraudulent or where the taxpayer has failed to file. The statute of limitations is also unlimited if the taxpayer fails to include certain forms related to foreign assets when required. Since the time frame to calculate liabilities can run from three to an unlimited number of years, the tax plus interest and penalties can easily add up to $52,000 or more.
ACT FAST TO PROTECT YOUR US PASSPORT
Anyone who receives a notice from the IRS or State Department of a seriously delinquent tax debt or who is certified for passport denial or limitation must act quickly. Affected US passport holders who have been identified as delinquent taxpayers should immediately consult a tax advisor and resolve any tax compliance issues before the FAST Act takes away their passport.
It should be noted that an application to renew an expiring US passport can be submitted up to nine months before its expiration date. Passport holders who have any inkling of a pending tax problem should file their renewal as early as possible to give themselves and their advisor time to work out a solution.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. Any tax advice contained herein may be insufficient for US penalty protection. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Jocelyn M. Magaway is a tax senior director and IRS enrolled agent of SGV & Co.
