IRS heats up enforcement on passport holders with ‘seriously delinquent’ tax debt
Before booking that trip abroad, taxpayers may just want to check their tax bill first. The IRS recently rolled out a new program focused on U.S. passport holders who underpay their taxes, and it could impact hundreds of thousands of taxpayers across the globe.
Under the new program, passport holders who owe seriously delinquent tax debt may be surprised to find out that they can’t travel abroad, because the IRS can now restrict their passports. Taxpayers with seriously delinquent tax debt are those who owe more than $50,000, have experienced past IRS collection enforcement, and aren’t in any arrangement to pay.
Right now, more than 15.6 million individual taxpayers owe the IRS back taxes. Hundreds of thousands of them owe more than $50,000. And with 4 in 10 U.S. citizens holding a passport and 9 million U.S. citizens living overseas, this could especially impact expats, who are more likely to owe larger sums of back taxes.
The IRS will certify applicable taxpayers as owing seriously delinquent tax debt. Then, the IRS provides that list of certified individuals to the U.S. State Department. The State Department will then deny passports to any new or renewing passport applicants with seriously delinquent tax debt. The State Department can also revoke or limit existing passports.
Expats are more likely to owe back taxes, less influenced by traditional IRS enforcement mechanisms
In 2011, the Government Accountability Office (GAO) reported significant noncompliance among U.S. taxpayers living abroad. For example, foreign-based U.S. taxpayers received more than 855,000 notices from the IRS in 2014. Furthermore, the GAO found in 2008 that at least 224,000 U.S. passport holders owed back taxes. Many owed significant amounts.
Why the tax problems? Expats frequently have foreign financial accounts and must follow complicated tax filing and reporting rules. Many don’t realize they must file a U.S. return. And, as part of the IRS focus on international noncompliance, expats have been clear targets. Most IRS enforcement has been centered on properly reporting foreign financial accounts and income. As the IRS starts using information it receives about foreign accounts under the Foreign Account Tax Compliance Act (FATCA), compliance enforcement will only increase.
Bottom line: Expats who have been subject to compliance enforcement generally have large tax liabilities and penalties. In the past, the IRS hasn’t been able to effectively reach many expats with its collection enforcement tools, such as liens and levies. However, with the new passport restrictions, the IRS will have the upper hand on many of these taxpayers to compel them to pay their back taxes.
How to get right with the IRS
Affected taxpayers with pending or upcoming overseas travel should look to getting into an agreement with the IRS as soon as possible.
If taxpayers owe less than $100,000, they can easily set up most installment agreements as long as they’re willing to allow the IRS to automatically draft payments. All other agreements and hardship situations will require taxpayers to file detailed statements and document their financial situation (called Collection Information Statements) to enter into an agreement and get in good standing with the IRS. These types of agreements take weeks, if not months, for the IRS to confirm.
Once a taxpayer is in good standing, the IRS will send a notification to the State Department within 30 days to remove the seriously delinquent tax debt status and lift passport restrictions. Currently, there’s no expedited process in place to lift passport restrictions for taxpayers who get back in good standing.
One important note: Paying the balance owed below the $50,000 mark without getting into an agreement with the IRS on the remaining balance will NOT lift the passport restrictions.
Expatriates: Know your tax status
Expats who have or suspect that they may have unpaid taxes should confirm their status with the IRS. Call the IRS Collection division at (855) 519-4965 or (267) 941-1004 for international calls.
Taxpayers who think that they may be subject to passport restrictions can call the State Department’s National Passport Information Center at (877) 487-2778.
Expats can also get specialized help from H&R Block Expat Tax Services, whose experts specialize in expat tax preparation and tax-filing compliance services.
Note that all tax credits are not created equal. Some penalties for tax mistakes are more costly due to the PATH Act.
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