Expats Beware: Your Passport Could Be Denied If You Owe Back Taxes
By Frances Power, Senior Associate, Advisory Services, Radius
Overdue US tax payments can now lead to denial of a passport or passport renewal. In January 2018, the IRS and the US Department of State began enforcement of a 2015 law that enables them to deny a passport to anyone with more than $51,000 in outstanding federal tax debt.
Expats on assignment and their employers should be aware of the ramifications of this law. Individuals should confirm their tax status, while multinational employers should examine the possible consequences to their workforce and update global mobility policies appropriately.
Overview of the New Rule
The relevant law, Internal Revenue Code (IRC) 7345, was enacted in 2015 as part of the Fixing America’s Surface Transportation (FAST) Act. It requires the Department of State to deny new passport applications or renewals of existing passports for individuals with more than $50,000 of tax debt, which the IRS classifies as "seriously delinquent." It took some time for the IRS to develop procedures to enforce IRC 7345, and in January of this year it finally issued a notice, updated its website and then commenced enforcement.
The IRS adjusts the amount of qualifying delinquent tax debt for inflation, so that amount is now $51,000, which includes back taxes, penalties and interest. Note that even a much smaller initial debt can balloon above the threshold through penalties and interest.
Once the Department of State receives a certification from the IRS, it will hold open an application for passport renewal for 90 days for the individual to make full payment, negotiate a payment plan or demonstrate reasons that the certification is not valid.
According to The Wall Street Journal, as of June 2018, after the first few months of enforcement, at least one individual paid $1 million in overdue taxes to avoid passport denial, and that at least 220 people have paid a total of $11.5 million in overdue debts.
Once an individual has been certified under IRC 7345, simply reducing the amount below $51,000 will not remove the certification.
The IRS typically mails the certification notice to the last known address, which can be a problem for those working abroad. Since that certification is sent to the Department of State simultaneously, it starts the 90-day clock. Neither any advance notice prior to certification nor any notice subsequent to the certification notice is required. Anyone with even a chance of being subject to this regulation should pay strict attention to any IRS communication.
Note that the individual would certainly have been mailed prior notices about delinquent debt, including a Notice of Deficiency. These are existing IRS procedures for collecting delinquent tax debt. IRC 7345 adds the new passport penalty.
If someone has a significant amount of tax debt, the best procedure is to conclude an installment agreement with the IRS, so that they can pay the debt down over time. If the payments are being made, no matter what the total amount, the IRS will not regard it as seriously delinquent. The IRS will reverse the certification within 30 days of the establishment of such an agreement.
Global Mobility Policies
When an employee working abroad loses his or her passport, significant business difficulties can ensue. There are several things employers can do to minimize the impact on employees and on their own operations:
- Add information about IRC 7345 to employee guidance, emphasizing the severe nature of the law and how it can affect employees' lives and the ability to execute their jobs
- Send written notices about the law to both applicants and current employees and include such information in onboarding procedures for employees who will either be posted abroad or may travel abroad on business
- Add provisions to the global mobility policy to encourage employees to notify the employer of any issues that might restrict employee travel
- Reassure employees that penalties associated with the Report of Foreign Bank and Financial Accounts (FBAR) are not included in the seriously delinquent total
- Determine what resources might be available for employees who do fall afoul of this law, such as expedited handling of communications to and from the government
The law is strict, and for someone who lives abroad or depends on foreign travel for income, passport denial can affect the ability to pay back the tax debt.