The U.S. Internal Revenue Service (IRS) estimates about 362,000 U.S. citizens may be subject to passport denial or revocation. Many of those affected may be on expatriate assignment abroad.
Starting in January 2018, the IRS and U.S. Department of State (DOS) began implementation of IRS Code Section 7345, a provision of the FAST Act signed on December 4, 2015. This new section requires the IRS to coordinate with the DOS to deny passports, and grants the discretion to revoke existing passports, of any U.S. citizen with “seriously delinquent tax debt”. Adjusted annually for inflation, “seriously delinquent tax debt” is defined with limited exceptions as $51,000 or more in tax liability for which IRS has filed a tax lien that has expired or has issued a levy. There are some exceptions under this program including a taxpayer:
- Who is in bankruptcy
- Who is identified by the IRS as a victim of tax-related identity theft
- Whose account the IRS has determined is currently not collectible due to hardship
- Who is located within a federally declared disaster area
- Who has a request pending with the IRS for an installment agreement or other payment agreement
- Who is serving in a combat zone
Potential Issues for Expats with IRS Notice to Substantially Delinquent Taxpayers
IRS Notice 2018-01 provides that the IRS will certify to the DOS those Americans with seriously delinquent tax debt. DOS “will generally deny an application for issuance or renewal of a passport from such individual, and may revoke or limit a passport previously issued to such individual.” When a certified taxpayer applies for a U.S. passport, the DOS will allow the applicant 90 days to resolve any tax liability with the IRS.
Since the FAST Act also allows the DOS to, in some cases, revoke U.S. passports, this could result in serious issues for an affected U.S. citizen traveling internationally between countries that have been notified of the revocation of the U.S. passport. If the last known address in the United States does not continue to accept mail for the U.S. passport holder, it is possible that the impacted traveler does not receive notification until he is denied entry to the destination country on an international flight. This may cause a substantial business disruption, since addressing this tax liability to enable a passport issuance and future international travel, can take a significant amount of time to resolve.
Notice must be provided to the impacted individuals, often to the last known U.S. address. For U.S. citizens on expatriate assignment, the last known U.S. address may or may not be a practically effective means of receiving notice, so many expats may not be aware of this development until they are experiencing issues with passport denials or revocation. Please find more information here about how to update your address with the IRS: https://www.irs.gov/faqs/irs-procedures/address-changes
Tax Filing Obligations for U.S. Citizen Employees Employed Abroad
Employers of U.S. citizen employees assigned abroad may wish to verify that their employees are annually filing their U.S. tax returns, maintaining compliance and staying current with tax liability payments. The United States imposes world-wide taxation on its citizens, regardless of residence, and it is not uncommon for Americans to be unaware of tax liability when assigned abroad for a significant period of time. The U.S. is one of a few countries that imposes world-wide taxation on its citizens.