by Mirit Reif
In 2015, a new section of the tax code, called “Revocation or Denial of Passport in Case of Certain Tax Delinquencies", was approved by both the House of Representatives and the Senate.
Under the new law, as of January 2016, the State Department can revoke, deny or limit U.S. passports for U.S. taxpayers that the IRS certifies as having a seriously delinquent tax debt in an amount in excess of $50,000, until they are back in good standing with the IRS.
The law was effective on the day Congress passed it in 2015, but only recently the IRS provided some indications of how it will administer the program that will be implemented in early 2017. More information on this will be published by the IRS in the next few months.
Here are a few questions and answers about the upcoming passport restrictions.
1. What is the passport-restriction program (IRC Section 7345)?
IRC Section 7345 requires the IRS to identify and “certify” U.S. citizens who have “seriously delinquent tax debt,” and provide this certification to the State Department. Consequently, the State Department will not issue a new passport, renew an existing passport, or limit use of the individuals’ passports until they receive notification from the IRS otherwise.
2. What is a “seriously delinquent” tax debt?
Seriously delinquent tax debt is an individual's unpaid, legally enforceable federal tax debt totaling more than $50,000 (including interest and penalties) for which a:
- Notice of federal tax lien has been filed and all administrative remedies under IRC §6320 have lapsed or been exhausted or;
- Levy has been issued
Some tax debt is not included in determining seriously delinquent tax debt even if it meets the above criteria. It includes tax debt:
- Being paid in a timely manner under an installment agreement entered into with the IRS.
- Being paid in a timely manner under an offer in compromise accepted by the IRS or a settlement agreement entered into with the Justice Department.
- For which a collection due process hearing is timely requested in connection with a levy to collect the debt.
- For which collection has been suspended because a request for innocent spouse relief under IRC §6015 has been made.
3. What will happen to taxpayers that owe a seriously delinquent tax debt?
The IRS is required to notify the taxpayer in writing by regular mail, to his last-known address that they are certified as owing seriously delinquent tax debt. This form is known as Notice CP 508C. At the same time, the IRS will send the certification to the State Department.
Before denying a passport, the State Department will hold the passport application for 90 days to allow the taxpayer to:
- Resolve any erroneous certification issues;
- Make full payment of the tax debt; or
- Enter into a satisfactory payment alternative with the IRS.
It is important to note that there is no grace period for resolving the debt before the State Department revokes a passport. But the Secretary of State may decide, before making the revocation, to limit a previously issued passport only for return travel to the United States or issue a limited passport that only permits return travel to the United States. This limitation can be problematic for U.S. citizens living abroad who have tax delinquencies and for U.S. citizens who travel overseas for work.
Once the taxpayers’ U.S. passport application is denied or revoked, the Department of State will notify the taxpayer in writing.
4. How can taxpayers get their passport restrictions lifted?
To get out of the passport restriction, taxpayers must get back into good standing with the IRS. If the taxpayer can’t pay the full amount they owe, they can make alternative payment arrangements such as an installment agreement or an offer in compromise and still keep their U.S. passport.
If a taxpayer disagrees with the tax amount or the certification was made in error, they should contact the phone number listed on Notice CP 508C. If they have already paid the tax debt, they should send proof of that payment to the address on Notice CP 508C.
If a taxpayer recently filed his tax return for the current year and is expecting a refund, the IRS will apply the refund to the debt and if the refund is sufficient to satisfy the seriously delinquent tax debt, the account is considered fully paid.
Once the tax issue is resolved with the IRS, the IRS will notify the taxpayer in writing by sending him Notice CP 508R, informing him that he is no longer on the certification list.
5. Can taxpayers just pay the balance to under $50,000 to remove the certification and passport restrictions?
No, just reducing the amount under $50,000 will not decertify the taxpayer. The taxpayer must either pay the entire balance or set up a payment agreement with the IRS as mentioned above.
6. When will the State Department remove the restriction on the passport?
The IRS will send the decertification list to the State Department, which then lifts the passport restrictions.
The IRS will notify the State Department of the reversal of the certification when:
- The tax debt is fully satisfied or becomes legally unenforceable.
- The tax debt is no longer seriously delinquent.
- The certification is erroneous.
The IRS will provide notice as soon as practicable if the certification is erroneous. The IRS will provide notice within 30 days of the date the debt is fully satisfied, becomes legally unenforceable or ceases to be seriously delinquent tax debt.
7. Can taxpayers appeal their seriously delinquent tax debt certification?
If the IRS certified the debt to the State Department, the taxpayer can file suit in the U.S. Tax Court or a U.S. District Court to have the court determine whether the certification is erroneous or the IRS failed to reverse the certification when it was required to do so. If the court determines the certification is erroneous or should be reversed, it can order reversal of the certification. Take into account that during this time, the taxpayers passport remains restricted until the court decides otherwise.
8. What can a seriously delinquent tax debtor do to avoid passport restrictions?
Taxpayers can avoid passport restrictions by making sure that they are in good standing with the IRS, and that they do not have a seriously delinquent tax debt.
Summary:
Owing taxes without being in an arrangement with the IRS to pay them has bad consequences for any taxpayer.
Taxpayers who think that they may be subject to passport restrictions can call the National Passport Information Center at (877) 487-2778 to check their passport status.
Taxpayers that need to leave in a few days for international travel and need to resolve passport issues, should call the phone number listed on Notice CP 508C. Taxpayers that already have a U.S. passport can use the passport until they are notified by the State Department that it’s taking action to revoke or limit it.
Being Compliant with your U.S. Tax Obligations:
As we have published and discussed in many of our previous articles, according to U.S. law, all U.S. citizens regardless where they live have an obligation to pay taxes on their worldwide income. In addition, in cases where the aggregate value of all foreign accounts exceeds $10,000 at any time during the calendar year they also have to report this information on a special form commonly known as the FBAR.
Not complying with one's U.S. tax or FBAR reporting duties could be considered a criminal offense in addition to a civil one.
The civil penalties can be very high. For instance, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50% of the total balance of the foreign account per violation. The criminal penalties can be harsh, for instance a person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to 10 years and criminal penalties of up to $500,000.
U.S. citizens that have not been complaint with their tax and FBAR obligations, have several options to fix this. The two main options are either participating in the Offshore Voluntary Disclosure Program (OVDP) or participating in the Streamlined Filing Compliance Procedure. Of course one of the main requirements in order to participate in any one of the programs is that the source of the unreported funds is legal.
The content of this article is intended to provide a general guide to the subject matters and is not a substitute for legal consultation. Specific legal advice should be sought in accordance with the particular circumstances