IRS Passport Revocation Leaves Americans Abroad Stranded

The United States Tax Code is very complicated, which can lead to some ethical taxpayers finding themselves in tax non-compliance situations that they may have otherwise avoided — had the tax code been made to be more user-friendly. These situations are further exacerbated by all the inaccurate information scattered across the world wide web. When taxpayers are out of compliance and have a significant tax debt, the government is able to leverage its powers to make the situation infinitely more detrimental to the taxpayer through Federal Tax Liens and Tax Levies. Making matters worse is one of the newer, more aggressive tactics the IRS has pursued in recent years, which is passport revocation and denial. In this type of situation, a taxpayer who has a seriously delinquent tax debt may find that their US Passport has been revoked. Whether or not the taxpayer intentionally or unintentionally went afoul of the tax code does not technically matter at the revocation/denial phase.  In other words, if the IRS determines that a US citizen has a tax debt that qualifies as a seriously delinquent tax debt (and has not entered into a payment agreement with the IRS), then the US Government can revoke the passport. This can be incredibly stressful for taxpayers living abroad in a Covid-heavy country and/or other taxpayers who reside overseas and may need to return to the United States for medical or family purposes. Let’s go through a simple example that we see often.

US Citizen Resides Overseas

Jim is a US citizen who resides in a foreign country. Jim earns $400,000 a year and pays a significant amount of tax in the foreign country. All of Jim’s income is sourced in the foreign country — aside from a bit of interest income generated from his US bank account. Therefore, Jim was under the misunderstanding that since he resides overseas, earns all of his money from overseas, and pays a significant amount of tax liability overseas, he is not required to file a tax return at this time. Recently, Jim learned that he actually should have been filing taxes this whole time he lived and worked abroad. This was around the same time that Jim went to the US Consulate to renew his passport which had recently expired.

US Citizen Goes to the Consulate

Jim goes down to the local US consulate to figure out how to renew his passport when he is told by the agent that the passport cannot be renewed at this time because the IRS marked the box stating that Jim has a seriously delinquent tax debt. It turns out that his company was reporting Jim’s salary to the IRS because they have Jim pegged as a US citizen. The problem was that the company never told him that he was still required to file US tax returns and the local tax consultant he was referred to did not tell him that he was required to file US taxes either. The problem is that Jim needs to get back to the United States for personal reasons and is now stuck in the IRS and USCIS matrices.

Getting into Compliance

Getting the passport back can be done but the process can be complicated — depending on the Taxpayer’s specific facts. In this fact scenario, Jim has not filed US tax returns for many years. Therefore, Jim must go back and file several years of tax returns in order to get into compliance. As an expat, Jim may qualify for the Streamlined Foreign Offshore Procedures if he can show that he was non-willful. This would help Jim avoid any fines and penalties for three years of tax returns and six years of missed FBAR filings. The problem though is that Jim has not filed tax returns for nine years and he is unsure of what type of information the IRS already has on him. At the same time, Jim has to be careful in making proactive communications to the IRS because if Jim is audited — then he loses the opportunity to submit to the Streamlined Procedures for non-compliance of his foreign accounts which are in the low seven-figures; penalties would be overwhelming. Before making any proactive representation to the IRS, Jim should speak with a Board-Certified Tax Law Specialist who specializes in offshore tax matters.

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