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Expat Briefing Editorial Team
21 December, 2015
As if American expats didn't have enough to worry about when attempting to ensure their tax affairs are in order following the introduction of the FBAR rules and the Foreign Account Tax Compliance Act, now Uncle Sam has the right to confiscate the passports of those who haven't paid the right amount of tax.
The new powers are buried in new legislation intended to fund the US Highway Trust Fund for a five-year period called the Fixing America's Surface Transportation (FAST) Act, and are expected to net the federal Government an additional USD395m in tax revenue over the next 10 years.
The Current Law
The Secretary of State already has powers to refuse to issue or renew a passport if the applicant owes child support in excess of USD2,500 or owes certain types of Federal debts. However, this authority does not extend to rejection or revocation of a passport on the basis of delinquent federal taxes.
Although issuance of a passport does not require a social security number or taxpayer identification number (TIN), the applicant is required under US tax law to provide such a number. Failure to provide a TIN is reported by the State Department to the IRS and may result in a USD500 fine.
The New Law
Under an amendment to the FAST Act added by the Senate, the Secretary of State is required to deny a passport (or renewal of a passport) to a "seriously delinquent taxpayer" and is permitted to revoke any passport previously issued to such a person. Additionally, the Secretary of State is authorized to deny an application for a passport if the applicant "willfully, intentionally, recklessly or negligently" fails to provide a social security number or provides an incorrect or invalid social security number. Exceptions to these rules are permitted for emergency or humanitarian circumstances, including the issuance of a passport for short-term use to return to the United States by the delinquent taxpayer.
While under current law tax returns are confidential and may not be disclosed by the IRS, the new legislation authorizes "limited sharing of information" between the Secretary of State and Secretary of the Treasury. So if the Commissioner of Internal Revenue certifies to the Secretary of the Treasury the identity of persons who have seriously delinquent federal tax debts, the Secretary of the Treasury is authorized to transmit such certification to the Secretary of State for use in determining whether to issue, renew, or revoke a passport.
The provision is effective on January 1, 2015.
What's A "Seriously Delinquent Taxpayer?
Under the legislation, a "seriously delinquent tax debt" generally includes any outstanding federal tax debt in excess of USD50,000, including interest and any penalties, for which a notice of lien or a notice of levy has been filed. However, the debt may not be considered "seriously delinquent" if it is being paid pursuant to an installment agreement, or the debt is subject to a legal hearing.
Impact on Expats
Unsurprisingly, the new law has been strongly criticized by expat advocacy groups, not only because the amendment was buried deep in an unrelated bill with little in the way of consultation with expats, but also because it merely adds to the tax risk facing Americans living and working abroad who depend heavily on their passports. Given the complexity of expat tax affairs, the potential for innocent mistakes is high, but, with this new law, the potential cost of such mistakes has also risen considerably.
Jonathan Lachowitz, Chairman American Citizens Abroad (ACA) said: "This provision is way too harsh and dangerous a remedy, especially for American taxpayers residing abroad who absolutely must have their US passport at hand. In many situations, they cannot do things like open a bank account, arrange for direct debit of utility bills, travel, or do many other everyday things, without their passport."
"Enactment of this legislation would come at a time when the IRS's, including Collections', ability to render services to taxpayers overseas and, in effect, help them 'work out' their collection problems, are severely reduced," he said. "IRS offices overseas have been closed. The ability of revenue officers in Collections to meet with taxpayers outside the US, as a practical matter, is non-existent."
Nigel Green, the CEO of deVere Group, a financial consultancy, has advised the estimated 8m Americans living overseas to "ensure their financial affairs are in order and compliant" by the New Year. It is likely, he said, that these taxpayers will be more affected because, "due to the cross border element, their financial affairs are, typically, far more complex than their counterparts 'back home.'"
"In addition, the Foreign Account Tax Compliance Act has added extra layers of complexity – meaning mistakes can be made more easily," he added, "and, since September 30, the would-be private financial information of Americans living overseas who have more than USD50,000 in accounts is now being sent automatically to the IRS."
He also noted that "expats are far more reliant on their passports for their work and their everyday lives than those who reside in the US."
It is not the intention of Expat Briefing to provide financial or tax advice, but if you're an American expat, with the tax stakes rising almost by the year, a dependable tax advisor who knows his stuff about US tax law, as well as the tax situation in the jurisdiction(s) in which you reside or visit regularly, could be worth their weight in gold.
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