U.S citizens traveling or residing abroad may soon find themselves without a valid U.S. passport. Pursuant to 2015 legislation, in January 2018, the Internal Revenue Service (the “IRS”) is anticipated to begin notifying the State Department of taxpayers with seriously delinquent tax debts. The State Department must either deny, revoke, or place limitations on delinquent taxpayer’s passports within 90 days of advisement.
Internal Revenue Code Section 7345 authorizes the IRS to certify to the State Department any taxpayers with unpaid federal tax debts (including interest and penalties) in excess of $50,000 for whom all administrative remedies have been exhausted, or for whom a federal tax lien or levy has been issued. Outstanding penalty assessments for failure to file FBARs are not considered U.S. federal tax debt, as those penalties are not assessed pursuant to federal tax statutes. Tax debts being validly contested or timely paid pursuant to an installment agreement or certain other settlement methods with the IRS will also not constitute delinquent tax debts for the certification purpose.
The IRS will notify affected taxpayers when it certifies them to the State Department. If the IRS does, in fact, begin providing the initial certification of taxpayer names to the State Department in January 2018, the first denials, revocations, or limitations of taxpayers’ passports will occur in May 2018. Affected taxpayers abroad may be required to return to the United States to address their outstanding tax debts at that time.
Citizens with affected passports have a few options: they must either pay their outstanding tax debts, enter into an installment agreement with the IRS, enter into an offer in compromise, claim innocent spouse relief, or administratively contest the tax debt in a timely manner. Once a taxpayer’s name has been certified to the State Department, the partial payment of the tax debt to get the outstanding balance below the $50,000 threshold will not lead to decertification of the taxpayer. Only those taxpayers that have entered into arrangements with the IRS to satisfy their full outstanding tax debts will be decertified with the State Department, at which time their passports will be either issued, reinstated, or cleared of all limitations.
U.S. citizens working or traveling abroad are encouraged to make arrangements now to settle their outstanding U.S. federal tax debts or risk facing serious restrictions on their ability to travel abroad. While there are several methods by which taxpayers can settle outstanding tax debts and avoid certification to the State Department, many of these methods take time to implement. We encourage anyone potentially affected to contact us as soon as possible to discuss your options and how to avoid significant travel disruptions.
If you have any questions about the upcoming taxpayer certification policy, or would like to know more about how to manage your taxes in 2018, please contact Serge Bechade, the author of this alert, at 617.456.8016 or [email protected], or Robert Maloney, the chair of the Corporate Practice Group, at 617.456.8008 or [email protected].