Tax Debt Passport Revocation for Expats Abroad (5 Facts)

Tax Debt Passport Revocation for Expats Abroad (5 Facts)

Tax Debt Passport Revocation for Expats Abroad

In recent years, the US government has increased enforcement of passport denial and revocations for US taxpayers who have seriously delinquent tax debts. In an all too common situation, a US person may be residing overseas as an Expat and be (blissfully) unaware of the requirements to continue filing a US tax return — since all of their income as being sourced outside of the United States. In addition, because the Taxpayer resides overseas, they may not be receiving consistent mail from the U.S. — and they never end up receiving notice from the US government that the IRS has been filing substituted returns, and the taxpayer unknowingly ends up in tax debt. If that tax debt exceeds $55,000 (adjusted for inflation), then when the Taxpayer goes in for their passport renewal/update, they may learn for the first time that their passport has been revoked. Let’s go through the basics of passport revocation for matters involving Internal Revenue Service tax liabilities.

Must be Seriously Delinquent

First and foremost, there must be a seriously delinquent tax debt. That means if a taxpayer owes $5,000 for example, that would be insufficient for the IRS to revoke their passport. Where the problem comes in for expats is that since they have not filed tax returns — and especially if the IRS has filed SFRs — the Expat has not claimed Foreign Tax Credits or the Foreign Earned Income Exclusion in the substituted filed returns. As a result, the Expat’s tax liability may look much more significant than it actually is – had they filed accurate tax returns.

Agreement to Pay

A key ingredient in the passport revocation is that the taxpayer has a civil area/delinquent tax debt and has not agreed to make payment.  For example, if the taxpayer entered into an installment agreement, then they would not be considered to have a seriously delinquent tax debt. Generally, if there are no other ancillary issues such as tax fraud or special agent investigations, then usually the taxpayer can enter into an installment agreement to avoid (or remedy) the situation.

Could Include Delinquent Tax Form Penalties 

An IRS seriously delinquent tax debt goes beyond income tax liabilities. It can also include certain international information reporting penalties such as the reporting for foreign trusts. This was the recent outcome of the case in the Fifth Circuit Court of Appeals that we have summarized and you can read about in our summary of the Franklin case.

FBAR Penalties are Not Tax Debts for Passport Revocation

The FBAR is not a tax form and not part of the Internal Revenue Code; rather, it is found under Title 31 (Money and Finance). The reason why this is important, is because FBAR penalties do not qualify as an IRS seriously delinquent tax debt that could warrant passport revocation or denial.

This is specifically provided by the IRS on their resources page, as follows:

      • Some tax debt isn’t included in seriously delinquent tax debt such as the Report of Foreign Bank and Financial Account (FBAR) penalty and child support.

Avoidance May be Easier than You Think

When a person is a US expat that resides overseas and comes to the realization that they may have missed several years of tax filings, they may be able to safely get into compliance without any fines and penalties — and avoid the passport revocation issue altogether. To accomplish this, the Expat would submit to the Streamlined Foreign Offshore Procedures which allows for late-filing of tax returns, international information returns, and FBARs — as well as it waives fines and penalties for items such as FBAR and FATCA non-compliance. In addition, taxpayers can also apply Foreign Tax Credits and the Foreign Earned Income Exclusion to try to eliminate any US tax liability.

Current Year vs Prior Year Non-Compliance

Once a taxpayer misses the reporting requirements for prior years, they will want to be careful before submitting their current year forms. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass file previous Tax Returns and FBARs without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

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