IRS Passport Revocation – Examples of Foreigners owing $50,000
IRS Passport Revocation or Denial
IRS Passport Revocation and IRS Passport Denial is a sad, but true reality. As you may or may not be aware, the U.S. Government recently snuck in a law that allows the IRS to cancel, deny or revoke your passport if you owe more than $50,000 to the IRS.
We know what you’re thinking: I don’t make that much money, I pay all my taxes in the foreign jurisdiction, and there is no way I could ever possibly owe the US government more than $50,000 in tax liability.
Unfortunately, it is really not that difficult of a burden to meet for most individuals and the IRS has every intention of enforcing their new found power.
FEIE and FTC
We understand that for most individuals, they will be able to fall back on either the Foreign Earned Income Exclusion (FEIE) and/or Foreign Tax Credit (FTC). The important (read: very, very important) thing to keep in mind is that if you have not filed taxes, then you have not applied the exclusion or foreign tax credits to your returns, and the IRS will have no record of it for your file.
Moreover, especially when it comes to the FEIE, if you do not properly claim the exclusion timely, the IRS can deny your request to use the exclusion in an untimely filed tax return at a later date.
The Foreign Earned Income Exclusion (FEIE) and/or Foreign Tax Credit (FTC) are two mechanisms which can only be claimed on the actual tax return. For example, if Steven lives overseas and earns $95,000 USD equivalent, but never filed taxes in the US and/or claimed the exclusion then the IRS has no record of it, and it would not be applied to Steven’s tax liability.
Will You Get “Caught”
There are a lot of high emotions online by individuals who could feasibly get stuck in this matrix of passport revocation, and feel it is very unfair to them. We agree. Moreover, there are some law firms that will tell you that unless you file if the IRS finds you you’ll go to jail for five years in prison; we disagree.
The reality is, there is no way to know whether you would ever get caught by the IRS. Out of the hundreds of millions of people, a minute fraction of them are audited each year. With that said, if you happen to be one of the unlucky few individuals audited, haven’t filed your U.S. taxes, and rely on your U.S. passport — then you may really have to consider getting into compliance, and carefully weigh the options for reporting.
That is also because while the IRS does not audit to everyone, the IRS is currently understaffed. Thus, if you happen to get caught in an audit or passport revocation situation it would take you countless hours to try to resolve the issue with an understaffed and lackadaisical IRS Agent who could not care less that you need the passport back ASAP for work travel, or to visit a sick relative in the U.S.
The following are a two common examples to keep in mind:
Steven – U.S. Person Abroad (Accidental Americans)
Steven is a U.S. citizen who was born overseas and is only a US citizen because his mother was a US citizen. He earns $95,000 annually and pays all of his tax in the foreign country – albeit a low tax jurisdiction – and if he did file, he would meet the elements to establish the Foreign Earned Income Exclusion. Steven never filed a US tax return, but Steven does have a Social Security number and a US passport that he travels on because that’s just always what he did when his mother first got him the passport. Moreover, Steven just received a “FATCA Letter” from his bank.
Steven has family in the United States and travels to the US about 3 to 4 times a year for about a week at a time. As a single person, Stephen would owe somewhere in the neighborhood of $15,000 -$25,000 a year depending on his deductions.
Problem: After not filing for about three (3) years, including penalties and interest, Stephen could easily exceed the $50,000 IRS debt liability threshold.
Resolution: Stephen should qualify for the Streamlined Foreign Offshore Procedures, which would both get him into tax compliance as well as avoid any penalties.
Michelle – Legal Permanent Resident (Small Business Owner)
Michelle is a legal permanent resident who resides abroad. The entrepreneurship bug bit Michelle when she was very young, and she has been operating two small businesses outside of the U.S. for many years.
Even though Michelle is a legal permanent resident of the United States and has been one for more than 20 years, she has not resided in the United States for many years (we are not taking into consideration any immigration status issues regarding “involuntary abandonment issues“). While Michele’s businesses do not earn much money, she does have some foreign mutual funds along with a business structure called a Sociedad Anonima.
Michelle travels to the United States (as well as many other countries) various times throughout the year for business and does not meet the FEIE Physical Presence Test – but she would qualify as a Bona-Fide Resident (BFR) of her foreign country.
Problem: Michelle has not filed the necessary form 5471 or 8621 for her foreign mutual fund/ PFIC. The penalty for the 5471 can be $10,000 per year and because she did not file the 8621, the statute of limitations on the prior year tax returns have not yet begin to run. Michelle could end up owing hundreds of thousands of dollars to the IRS in fines and penalties.
Resolution: since Michelle will not meet the streamlined “foreign resident rule,” she can get into compliance using either the Streamlined Domestic Offshore Procedures, or consider a Reasonable Cause Submission.
IRS Offshore Voluntary Disclosure
Before making any affirmative representation, or past filing to the IRS it is important to speak with an experienced offshore disclosure where to learn the pros and cons of each different approach.