In the press you hear stories of the IRS revoking passports, but in reality, this does not appear to happen as often. Is it just an empty threat to encourage people to file their returns or is this something that is actively happening? Have you had anyone come to you that has had problems getting their passport renewed?
Code Section 7345 Passport Revocation and Denial for Seriously Delinquent Tax Debts
The recently issued Code Section 7345 does state that the IRS may take away passports if back taxes in excess of $52,000 USD are owed. However, this is not quite as simple in practice; it is hard work to actively find the person who owes the back taxes, and remove their passport, especially when they may live anywhere in the world.
However, there are certainly cases where this does occur. A real-life example of this was when a client was applying for a U.S. passport for her child in order to travel to the U.S. She submitted the paperwork necessary, but was asked to come back in, and on her return, the consulate refused to return her passport because of the back taxes that she owed. She was given the option either to pay the full amount she owed within the next 90 days, or to return to the US with a substitute travel document.
At this point she gathered all the data she had about the situation and got in contact with her tax advisor. They had to go through all her old tax returns. The IRS had tracked her unpaid back taxes from back in 2007, from which she owed $70,000 USD.
Within a day, Tanveer from Expat Tax Online was able to collect all the facts and track down all the amounts she owed in tax, including the accumulated interest. They were also able to discuss and review any possibility for abatement, and ultimately see if there is any way in which the amount the client owed could be minimised.
In cases like these, advisors are able to represent their client in talking to the IRS and seeing if there are any possibilities to reduce the amount of back tax that is owed.
In this situation, the advisor has helped this client with the relevant facts and talking to IRS, this has enabled her to write off the taxes owed for most of 2007 and 2008. She was also able to abate some penalties for other tax years too. The final settlement that she owed was around $28,000 USD, compared with the original $70,000 USD. She was able to organise payments for that within about a week. Then were able to send data to the consulate, who then returned the passport to the woman after about 3 weeks.
This is not just a scaremongering tactic; people do run into trouble getting their passports renewed when back taxes are owed. The assumption is made that it is only an issue potentially for those who owe millions in back taxes, however the limit of $52,000 USD is clearly widely applied?
This limit is in place for US passport holders. For green card holders, they expect tax compliance. When they enter the US having been living elsewhere for a number of years, they have to prove that they have been filing their taxes. There have been cases where people have been denied their green card, denied entry into the US and sent on a flight back again.
I want more information about Passport Revocation and Denial for Seriously Delinquent Tax Debts
Was the woman in this example not filing her tax returns? Or was she filing the returns and not paying the taxes she owed?
For a few years, she filed her tax returns but did not pay the tax that she owed. The fact that she lived overseas meant that filing tax returns became more complicated, so she also missed filing some. With the help from Expat Tax Online, she was able to get the amount of back tax she owed below 52,000 dollars, and then was able to begin to make payments. This put her in a position that enabled the consulate to return her passport to her, on the condition that she would file the rest of her tax returns. She was told by the consulate to be tax compliant as soon as possible and continued to work with the tax advisor in this process.
Ultimately, in this situation, the IRS were asking for $70,000 USD, and with the help of Tanveer, she was able to reduce this amount by more than half, saving her a significant amount of back tax payments, which put her in the situation where she was able to have her passport returned to her relatively quickly.
The IRS and State Department are working more closely together with sharing information in cases like this. This surely has the potential to cause problems for some people who are unaware of the situation?
It is easy to get the impression that these departments are, on the whole, lackluster about enforcing this rule. However, we are now in a situation where both the departments are working together, looking for people who are not complying with the tax rules, and will go to a great extent to get money that they are owed. The US Treasury (including the IRS) have invested heavily in implementing programmes such as FATCA that help those who live abroad, thus they are going after as many people as they can who owe back taxes, so that they can put money back into the system.
Streamlined Tax Amnesty Program
In the aforementioned situation of the client having her passport removed, she was still able to use the Streamlined tax amnesty program, which made it easier for her to come into tax compliance. She also was advised to make use of an abatement to reduce the amount she owed. Is there anything else you could do to help a client in a similar situation?
We have to look at every possibility to minimise the taxes in situations such as this. Our speciality is taking care of our clients and looking at all the potential ways to help them to reduce the amount owed, come into compliance, and pay the right amount of tax.
Contact us at Expat Tax Online to learn more.