by: Derek W. Kaczmarek, J.D., LL.M. and Giselle C. Alexander, J.D., LL.M., C.P.A.
As part of last December’s transportation bill, Congress passed a new weapon in the I.R.S.’s collection arsenal – the authority to revoke or deny passports “in case of certain tax delinquencies”. Taxpayers with upcoming international trips should ensure federal income taxes have been paid or that adequate steps have been taken to resolve pending income tax issues to avoid a nasty surprise.
Recognizing the need to increase revenue collection, Congress is targeting delinquent taxpayers appearing to have the means to travel internationally. The Joint Committee on Taxation expects the I.R.S.’s new passport denial and revocation powers to raise approximately $400 million over the next ten years.
In a little noticed tax provision of the highway funding bill known as Fixing America’s Surface Transportation Act, the “FAST Act”, added a new section 7345 to the Internal Revenue Code. Congress authorized the I.R.S. to deny, revoke, or limit U.S. taxpayers’ passports. The new law officially took effect January 1, 2016. In passing this bill, Congress added a new level of urgency to tax resolution for individuals with business operations in foreign countries, college students studying abroad, families with international spring break trips planned, and anyone else with delinquent taxes and foreign travel plans.
The government’s new plan to collect “seriously delinquent tax debt” targets taxpayers traveling outside the U.S. To be “eligible” for the I.R.S.’s proposed suspension of a passport, the debt must exceed $50,000 and be “seriously delinquent”. The $50,000 threshold includes penalties and interest – it is not limited to the amount of unpaid federal taxes. To be “seriously delinquent”, the I.R.S. must have filed either a tax lien or levy to collect the unpaid taxes. The provision contemplates a notification system that transmits certification from the I.R.S. to the Secretary of State (via the Secretary of Treasury). As of the end of January, the I.R.S. is still working on implementation of its new authority.
As with most laws, the FAST Act contains exceptions to the passport restrictions. Specifically, if taxpayers have taken action to resolve the I.R.S. collection activity – through measures challenging the debt collection, such as a Collection Due Process Hearing or Innocent Spouse Relief Request or through measures taking action to resolve the outstanding debt, such as through an offer in compromise or an installment agreement, this provision should not apply. The Secretary of State will also have authorization to issue passports, despite seriously delinquent tax debt, in emergency and humanitarian situations.
While the law permits return to the U.S. if a taxpayer’s passport is suspended while the taxpayer is outside the U.S., Americans living and working abroad may be seriously impacted by the new law. I.R.S. notification systems are not designed to accommodate international addresses resulting in some U.S. citizens potentially not being aware of I.R.S. collection activity. Further, many foreign countries tie work visas and residency permits to a valid passport.
Individuals with foreign travel plans in the near future and federal income tax debt should consult with a tax professional to evaluate the potential impact of the proposed legislation on their travel plans. Contact DWK Tax Law today.