On December 4, 2015 Congress and the President enacted the “FAST Act” (“Fixing America’s Surface Transportation Act”). One part of the Act provides that the Secretary of State “shall not” issue a passport (except for emergencies or humanitarian reasons) to an individual who owes a “seriously delinquent tax debt” to the IRS. (Act sec. 32101 (e)(1)). Also (and perhaps of more general consequence), if an individual owes a “seriously delinquent tax debt” the Secretary of State “may” revoke the individual’s existing passport, or limit the passport to returning to the US (Act sec. 32101 (e)(2)). A new section of the Internal Revenue Code, sec. 7345, addresses the matter.
One can imagine that these provisions are intended to counter flight risk (and also, in the case of the latter provision, to put pressure on the individual to settle with the IRS).
Seriously Delinquent Tax Debt
An individual has a “seriously delinquent tax debt” if he or she has a Federal tax liability that exceeds $50,000 (including income, gift, Social Security, Self Employment, and excise taxes, and interest and penalties on the taxes) – and, also, the IRS has filed a notice of lien against the individual’s assets and either the individual has exhausted his or her rights to a fair hearing on the tax lien (Internal Revenue Code sec. 6320 ), the individual has let the time for exercising those rights lapse, or the IRS has levied on an individual’s asset (under Code sec. 6331).
Uncertainty Around The Edges
The authors suspect (but are not sure) that penalties for FBAR violations should not be considered “tax debts”. (Cf, Williams v. Commissioner, 131 TC 54 (2008); also Whistleblower 22716-1310, 146 TC No. 6 (2016)).
We’re undecided about whether penalties for failing to report the existence of properly reportable “specified foreign financial accounts” (IRS Form 8938 under Internal Revenue Code 6038D) should or should not be considered “tax debts”. (The penalty for failing to report income from improperly undisclosed “specified foreign financial accounts” is clearly a “tax debt”; but the related penalty for failing to properly report the existence of “specified foreign financial accounts” may or may not be a “tax debt”).
As fascinating as we may find this distinction (and we do), the practical approach for taxpayers is to not become the test case and, instead, to properly report not only all income from foreign financial accounts but, also, properly report the existence of foreign financial accounts to the extent required in the Code.
Resolving Tax Problems Reduces Travel Complications
There is ample opportunity built into the process (Code secs. 7345, 6320 and 6331) by which the IRS must, on multiple occasions, notify the individual of the potential passport risks.
Also, even if the IRS has determined that an individual has a “seriously delinquent tax debt”, the individual may avoid passport non-issuance or passport revocation by paying the tax debt (either in full, or by meeting his/her payment obligations under an installment agreement or offer in compromise), or if the IRS’ collection action is suspended during an innocent spouse determination. Also, the taxpayer may litigate the IRS’ decision in either the US Tax Court or in a US District Court.
Regulations and Procedures Still a Work in Progress
The new statutory provisions are effective as of Dec. 4, 2015. To date the Treasury has not yet issued regulations implementing the new law. Also, the State Department will likely have to put procedures into place to address the new law (especially procedures concerning the Secretary of State’s discretion to revoke or limit an existing passport).
Be On The Alert
US citizens (especially naturalized US citizens with business or family ties abroad) who regularly travel overseas for business or family may have to be particularly alert to this new tool in the IRS’ kit. Similarly, overseas-resident US citizens should also be particularly on the alert to this threat.
And, a US citizen who receives a notification from the IRS that he or she has been certified as having a “seriously delinquent tax debt”, or that he or she may be certified as having a “seriously delinquent tax debt” should promptly contact qualified tax counsel to address the risk to the individual’s US passport or right to obtain a US passport.
About the Authors
Jonathan Davis represents clients in tax law (domestic and international), estate planning (domestic and international), compensation planning, business transactions, and probate. His practice also includes “business divorces” and disputes over estates and trusts.