Starting Jan 1, 2016: Passport Revocation Now a Reality

Starting today – the IRS now has the authority to revoke your passport. A happy new year from Uncle Sam! I wrote about this in 2012, and almost four years later, it is a reality. Buried on page 1,113 of H.R. 22, a five-year, $305 billion infrastructure-spending bill, is a chapter titled Revocation or Denial of Passport in Case of Certain Tax Delinquencies. This section gives the IRS control over your person, as well as the authority to revoke your right to travel, live, work and conduct business internationally. If you live abroad and owe the IRS money, the agency can cancel your passport and force you to come back, work and pay off your debts as a tax slave.

Here’s how the government owns your ass: if your passport is revoked, and you don’t have a second passport in hand, you will be prevented from traveling anywhere outside of the United States. If you’re abroad, you will be forced to return to US. In addition to these travel issues, without a second passport, you will also be unable to open a bank or brokerage accounts abroad, create asset protection structures, operate a business, or invest outside of the land of the free.

It matters not to Uncle Sam that forcing you to return to the US without notice will cause you significant inconvenience or financial harm. There is also no process for an appeal; you are put on the first plane to the US and told to go deal with the IRS. The only good news is that the flight home is free! The bad news is that you don’t get to chose your travel date or the US city in which you will land.

Say you are living abroad and didn’t file a tax return for a year or two, and under the Foreign Account Tax Compliance Act (FATCA), the IRS gets a report of one of your offshore accounts and generate what is called a Substitute For Return (SFR). SFRs are prepared on your behalf using whatever data the IRS’ computers have (which could be anything), and they don’t include any deductions, exemptions, or expenses (including Foreign Earned Income Exclusion (FEIE)). The balance due from an SFR is almost certainly higher than what it would be if you had prepared a proper return (even before factoring in the penalties discussed below). Once the SFRs are entered into the system, a notice is mailed to your last known address. After several notices, a final letter, called a CP-504, is sent in the certified mail. If you don’t contest this bill in tax court within 30 days, the amount will then become final and payable.

Anyone that the IRS certifies as having a seriously delinquent tax debt in excess of $50,000 is at risk. The IRS can “certify” a debt by simply printing out a report showing their internal processes were followed and that the computer says you owe money (an SFR, as discussed above).

It’s also not hard to reach this $50,000 threshold. The standard Foreign Bank and Financial Accounts (FBAR) penalty starts at $10,000 per year, and can reach as high as $100,000. The same goes for foreign corporate returns; see, for instance, IRC Section 6038(b)(1), which stipulates that a penalty of $10,000 will be incurred for each Form 5471 that is filed after the due date.

The IRS has no need to prove its case in court, get a judgment or collection order from a judge, as is required in all other civil cases, or even do something as courteous as phone or email the taxpayer for an explanation. If the computer says you owe money, your passport can and will be revoked, refused or canceled mid-transit.

For Those Who Don’t File

I get calls all the time from people who assume they don’t need to file returns if their income is under the FEIE amount. They are living abroad, have not set foot in the US in a while, and make under $100,000. Americans abroad all too often think they aren’t required to file. They feel no sense of urgency because once the forms are in, no taxes will be due. Why spend money on tax preparation?

Here’s the problem with that plan: as of January 1, 2015, your foreign bank account and income will, under FATCA, be reported to the IRS. This data can be used to prepare SFRs and create a debt, and then the IRS has you. The agency will not give you credit for FEIE when they prepare an SFR.

Identity Theft

The new ruling will also apply to those whose identity has been stolen. Say, your Social Security number was used by an illegal alien to get a job. The worker gets paid under your Social Security number with zero withholding, a W-2 was issued tied to your account, and the IRS comes after you for the taxes owed.

Let’s take a further step and assume that the alien claimed some dependents, and because of this, there was no withholding, which means no money was paid to the IRS for the taxes due against the wages earned. It often takes several years for the IRS to come after you, and that interest and penalties will be added to the balance, and you will see that $50,000 is a very low threshold. There were almost two million suspected tax-related identity theft incidents in 2013 alone.

Unbeknownst to you, your identity can be stolen, and the IRS can “certify” the debt, file a tax lien, and revoke your passport. It does not matter that you didn’t know that your identity had been stolen, or that you didn’t receive any letters. The IRS’ only obligation is to mail notices to your last known address using traditional US mail. If you’ve moved, or letters never reach you because you are abroad or traveling, that becomes entirely your problem. You won’t get a WhatsApp or Facebook message or email – snail mail only, from Uncle Sam.

If you don’t travel much, you should check your expiration date, as you will also be refused a new passport if you have tax debt. And, starting in January 2016, you can no longer get additional pages added to your passport. If you run through the very small blue booklet with stamps, stickers and visas, you’ll need to apply for an entirely new passport, which will be denied from you if you have a suspected debt of over $50,000 owed to the IRS. Americans will be able to add more pages to their passport up until December 31, 2015, which is obviously the sensible way to solve the issue. Why are we going back in time? Of course, safety and terrorism will be thrown in as a defense for this nonsensical change.

What can be done?

If it’s not clear already, it is now an absolute necessity for Americans abroad to obtain a legitimate second passport – by any means necessary.

As is typical of their kind, politicians stuffed and pork-barreled the amendment into a boring and largely ignored bill, 52102(d) of the Transportation Funding Act of 2015. (The full text can be found at bottom of the article.) This change officially turns you, Mr. Expat, into a global tax slave for the US. The US is one of only two countries in the world that taxes its citizens on their worldwide income (as opposed to residency). This is essentially taxation without representation, as expats don’t live in any state in the US, and senators and state representatives represent states. So expats typically have voting rights in the state that they previously resided. A friend of mine, who is a fellow expat and international tax attorney specializing in US expat tax issues, suggests solving this issue by setting up residency in Florida. Not only is it very easy to get a driver’s license there, but there is also no state tax, and Florida has the most international city in the US – Miami.

The only way to address the new ruling is to obtain a second passport. Now more than ever, there is a clear and obvious reason to obtain one. I interpret this bill to mean that the IRS can revoke your passport if you owe back taxes or have unfiled returns. Failure to file typically results in returns being prepared on your behalf by the IRS computers, with no human interaction. In other words, if you don’t file a return, you’ll face a computer-generated return that creates a balance due and a tax debt and in turn, a canceled passport.

If you don’t have a second passport, you will have no right to an appeal, to speak with an attorney, to plead your case to a judge in your country, or any way to prevent being sent back to the US to face the IRS. Without valid travel document, you are in legal limbo and have no recourse or rights. You see, the IRS will revoke your passport while you are in transit. The agency knows when you are flying from one country to another, and will, with just a few keystrokes, revoke your passport while you are in the air. When you land and attempt to enter your destination country, you will find your passport invalid. The airline that you traveled with is now required to return you to the country that issued your passport. You have no right to an attorney, no right to enter the country to fight the claim of a certified debt, and no right to an appeal. You will be held in the transit area under guard until you are put on the next flight to the US. Think of Tom Hanks’ character in the movie The Terminal, or Edward Snowden. Unless Mr. Putin comes to your rescue, you are headed back to the States.

Being denied admission to a country is not the same as being extradited. Once you are in a country, you have all the rights conveyed by its legal system and courts. When you’re in transit, you have no rights – you are at the mercy of the country whose passport you hold. If you don’t have a valid travel document, your only choice is to return to your home country.

There are many different ways to obtain a second passport:

1. By heritage. If your parents or grandparents were born outside of the US, you may be eligible for citizenship from their original country. If you would like us to review your heritage options, please email us at [email protected].

2. By marriage. Most countries grant residency and then citizenship to the spouse of a citizen, though normally only after a period of residency.

3. By investment or cash payment. You can make an investment and/or pay cash to get a second passport immediately. If you have the money to spend and invest, you have many options. Every citizenship-by-investment option globally is listed at Passports.IO.

4. Earn citizenship through residency. In some countries, you can become a resident, contribute to their economy and culture, and earn the right to apply for citizenship after a few years. We also include many different residency-to-citizenship options at Passports.IO.

Residency is a Great First Step

As a resident, you have more rights to contest an attack by the IRS. A tourist has little or no standing, while a resident is given status by the fact that he or she is a lawful member of the community. A resident may also stay in a country for as long as he wishes. A tourist must usually travel outside the country every four or six months, putting him at risk with each and every trip. Also, if you’re caught overstaying your tourist visa, you can be removed from the country – something that commonly happens with tourists in many different parts of the world.

Most importantly, some forms of residency lead to citizenship after a few years. For example, if you have been a resident of Panama for four years, you can apply for citizenship, and with citizenship comes a passport.

A Panama passport is an excellent travel document, so I recommend that program for anyone who wants to “earn” citizenship over a number of years rather than purchase it. Paraguay, Uruguay are similar options in South America. Whatever the country, it’s clear and obvious that if you don’t already have a second passport – now is the time to start taking action in this direction.

 

Specifically, Subchapter D of Chapter 75 of the Internal Revenue Code was amended with the following:

“SEC. 7345. REVOCATION OR DENIAL OF PASSPORT IN CASE OF CERTAIN TAX DELINQUENCIES.
“(a) In General.-If the Secretary receives certification by the Commissioner of Internal Revenue that any individual has a seriously delinquent tax debt in an amount in excess of $50,000, the Secretary shall transmit such certification to the Secretary of State for action with respect to denial, revocation, or limitation of a passport pursuant to section 52102(d) of the Transportation Funding Act of 2015.
“(b) Seriously Delinquent Tax Debt.-For purposes of this section, the term ‘seriously delinquent tax debt’ means an outstanding debt under this title for which a notice of lien has been filed in public records pursuant to section 6323 or a notice of levy has been filed pursuant to section 6331, except that such term does not include-
“(1) a debt that is being paid in a timely manner pursuant to an agreement under section 6159 or 7122, and
“(2) a debt with respect to which collection is suspended because a collection due process hearing under section 6330, or relief under subsection (b), (c), or (f) of section 6015, is requested or pending.
“(c) Adjustment For Inflation.-In the case of a calendar year beginning after 2016, the dollar amount in subsection (a) shall be increased by an amount equal to-
“(1) such dollar amount, multiplied by
“(2) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year, determined by substituting ‘calendar year 2015’ for ‘calendar year 1992’ in subparagraph (B) thereof.
If any amount as adjusted under the preceding sentence is not a multiple of $1,000, such amount shall be rounded to the next highest multiple of $1,000.”.
(b) Clerical Amendment.-The table of sections for subchapter D of chapter 75 of the Internal Revenue Code of 1986 is amended by adding at the end the following new item:

“Sec. 7345. Revocation or denial of passport in case of certain tax delinquencies.”.
(c) Authority For Information Sharing.-
(1) IN GENERAL.-Subsection (l) of section 6103 of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph:

“(23) DISCLOSURE OF RETURN INFORMATION TO DEPARTMENT OF STATE FOR PURPOSES OF PASSPORT REVOCATION UNDER SECTION 7345.-
“(A) IN GENERAL.-The Secretary shall, upon receiving a certification described in section 7345, disclose to the Secretary of State return information with respect to a taxpayer who has a seriously delinquent tax debt described in such section. Such return information shall be limited to-
“(i) the taxpayer identity information with respect to such taxpayer, and
“(ii) the amount of such seriously delinquent tax debt.
“(B) RESTRICTION ON DISCLOSURE.-Return information disclosed under subparagraph (A) may be used by officers and employees of the Department of State for the purposes of, and to the extent necessary in, carrying out the requirements of section 52102(d) of the Transportation Funding Act of 2015″..”.
(2) CONFORMING AMENDMENT.-Paragraph (4) of section 6103(p) of such Code is amended by striking “or (22)” each place it appears in subparagraph (F)(ii) and in the matter preceding subparagraph (A) and inserting “(22), or (23)”.
(d) Authority To Deny Or Revoke Passport.-
(1) DENIAL.-
(A) IN GENERAL.-Except as provided under subparagraph (B), upon receiving a certification described in section 7345 of the Internal Revenue Code of 1986 from the Secretary of the Treasury, the Secretary of State shall not issue a passport to any individual who has a seriously delinquent tax debt described in such section.
(B) EMERGENCY AND HUMANITARIAN SITUATIONS.-Notwithstanding subparagraph (A), the Secretary of State may issue a passport, in emergency circumstances or for humanitarian reasons, to an individual described in such subparagraph.
(2) REVOCATION.-
(A) IN GENERAL.-The Secretary of State may revoke a passport previously issued to any individual described in paragraph (1)(A).
(B) LIMITATION FOR RETURN TO UNITED STATES.-If the Secretary of State decides to revoke a passport under subparagraph (A), the Secretary of State, before revocation, may-
(i) limit a previously issued passport only for return travel to the United States; or
(ii) issue a limited passport that only permits return travel to the United States.
(3) HOLD HARMLESS.-The Secretary of the Treasury and the Secretary of State shall not be liable to an individual for any action with respect to a certification by the Commissioner of Internal Revenue under section 7345 of the Internal Revenue Code of 1986.
(e) Revocation Or Denial Of Passport In Case Of Individual Without Social Security Account Number.-
(1) DENIAL.-
(A) IN GENERAL.-Except as provided under subparagraph (B), upon receiving an application for a passport from an individual that either-
(i) does not include the social security account number issued to that individual, or
(ii) includes an incorrect or invalid social security number willfully, intentionally, negligently, or recklessly provided by such individual,
the Secretary of State is authorized to deny such application and is authorized to not issue a passport to the individual.
(B) EMERGENCY AND HUMANITARIAN SITUATIONS.-Notwithstanding subparagraph (A), the Secretary of State may issue a passport, in emergency circumstances or for humanitarian reasons, to an individual described in subparagraph (A).
(2) REVOCATION.-
(A) IN GENERAL.-The Secretary of State may revoke a passport previously issued to any individual described in paragraph (1)(A).
(B) LIMITATION FOR RETURN TO UNITED STATES.-If the Secretary of State decides to revoke a passport under subparagraph (A), the Secretary of State, before revocation, may-
(i) limit a previously issued passport only for return travel to the United States; or
(ii) issue a limited passport that only permits return travel to the United States.
(f) Effective Date.-The provisions of, and amendments made by, this section shall take effect on January 1, 2016.