If you owe the IRS a whole lot of tax money, you may lose your ability to travel abroad... if you do absolutely nothing to address the debt.
Oh, and if Uncle Sam ever gets around to enforcing that penalty.
Back in December 2015, Section 7345 of the tax code went into effect and gave the Internal Revenue Service the ability to revoke your passport for nonpayment of taxes. Granted, your outstanding taxes, interest and penalties have to add up to $50,000 or more during the last ten years, a notice of lien has to be filed against you and a levy has to be issued, but it's possible.
Still, you'd have to ignore the fact that you can enter an agreement with the IRS to pay off the debt in installments for that penalty to apply. You'd also have to completely wave off an offer in compromise or settlement agreement with the IRS and reject a collection due process hearing to determine the amount of the levy owed. Then you'd have to completely burn the the 90 days the State Department gives you to sort out errors in your outstanding debt, pay the debt off entirely or enter an IRS installment plan.
"There really has to be willful blindness on the part of the taxpayer to get into this kind of situation," says Barry Weisman of Anchin, Bloch and Anchin. "Just truly ignoring or being in denial about an IRS assessment."
The IRS has only begun sending out notices to taxpayers with that level of debt this year. Several states have resorted to suspending or revoking driver's licenses to coax the payment of outstanding tax debt -- with Weisman noting that New York does so for debt of $10,000 or more -- but the State Department's failure to issue or renew your passport after receiving certification from the IRS has serious implications for a very narrow group of U.S. citizens. Unfortunately for those folks, a large portion of their subset tends to live outside the country. Their are a couple of reasons why expats would be disproportionately affected.
"First, they would typically use their passports more often - not only for travel but for administrative matters, such as rental contracts, in their countries of residence," says Nigel Green, founder and chief executive of U.K.-based finance firm deVere Group. "And second, since the worldwide rollout of the highly controversial Foreign Account Tax Compliance Act, or FATCA, in 2014, tax returns have become more complex, onerous and burdensome for U.S. expats due to additional reporting requirements."
In Green's experience working with U.S. citizens who live abroad, 35% likely to make a mistake on their tax return and/or file late due to both FATCA and Section 7345. However, Weisman reminds those taxpayers that any outstanding debt would have to be assessed first. If there isn't an outstanding assessment, Section 7345 doesn't apply. If there's been an assessment, you, your attorney or your accountant can request a transcript of your account from the IRS just to clarify how much you owe.
When that transcript arrives, just keep in mind that your debt doesn't have to be strictly related to income taxes. It doesn't have to be income taxes: If employment taxes have been assessed against you or you were audited years ago and lost track of the results of that audit, what you owe the IRS could easily balloon to that magic $50,000. While that's certainly a problem for dual citizens or expats, taxpayers who haven't given their passport a workout in a while can run afoul of these issues as well.
"The IRS is targeting a relatively small group of taxpayers that has either forgotten about it or is living overseas and doesn't think it applies to them, or just ignored it and wished it away," Weisman says. "These are people who, for one reason or another, didn't seek advice, got improper advice or just didn't want to do anything."
That latter category typically consists of people at Weisman says are "playing the statute-of-limitations game." They know that the IRS only has ten years to collect on assessments, thanks to its statute of limitations, so they'll attempt to wait it out. Unless the Justice Department reduced the assessment to a judgement, typically those folks could get away with it. With their passports on the line, they can't necessarily wait it out anymore. Of course, there are also somewhat less devious reasons for falling into this category.
"There are people who owed a lot of money on their tax return for improper withholding, no withholding or they just didn't pay estimated taxes," Weisman says. "Often you see this happen with attorneys: They'll withdraw from a partnership and won't put enough money away for taxes and owe a lot of money and, they too, could be seriously delinquent."
Ordinarilly, seriously delinquent taxpayers would have just two options once that assessment arrived: either get proactive and pay it off (either as a whole or in installments) or stay passive and hope for the best. However, that latter option has gained some merit since the election. The IRS has issued no guidance on this new passport rule, and Weisman notes that no one has had their passport revoked as a result of it yet. The IRS and State Department are two massive bureaucracies on their best day, but without guidance, there's no specific place for the IRS to send a certification to, there's no instruction for what to do in case of a district court filing and there's been no indication by President Donald Trump's administration that they'll be any further guidance on this matter going forward.
While that bodes well for some taxpayers who've already received notices, deVere's Green says the uncertainty surrounding Section 7345 shouldn't give expats a false sense of security. Their passports are far too valuable to gamble with, which is why they should seek assistance with their outstanding tax assessments.
"For U.S. citizens who are resident overseas, the IRS' latest weapon to collect taxes, means it is more important than ever to stay on top of your taxes and file on time and correctly," he says. "With this in mind it's recommended that before submitting their tax returns they have them checked by an advisor with the relevant cross-border experience."