Another turn of the screw for Americans abroad as the money hungry IRS and expatriate hating senator Orrin Hatch team up to take passports away from luckless debtors.
Expatriate United States citizens have become accustomed to repeated attempts by Republican Senator Charles Grassley of Iowa to add to their tax burden by reducing the foreign income exemption and housing deduction. In the latest effort to use tax laws to further burden expatriates, the Republican-controlled Congress included in a recently passed a highway funding law provision long championed by Senator Orrin Hatch (Republican – Utah) that could deny passports to United States citizens.
On December 4, 2015, President Obama signed into law Public Law 114-94, the Fixing America’s Surface Transportation (“FAST”) Act. The FAST Act enacted new Section 7345 of the Internal Revenue Code, which authorizes the revocation or denial of United States passports to individuals who have a “seriously delinquent” tax debt of over $50,000.
The passport denial concept is not new; a 1997 law, the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), requires the Secretary of State refuse to issue a passport to any person certified by the Secretary of the Department of Health and Human Services as owing a child support debt greater than US$2,500, or, the Secretary of State may revoke, restrict, or limit a passport previously issued to an individual owing such a child support debt.
Under the new law, the Secretary of State:
- shall not issue a passport to an individual with a seriously delinquent tax debt;
- may revoke a passport previously issued to an individual with a seriously delinquent tax debt.
“Business persons, diplomats and government officials in Hong Kong need to be aware of the latest in a pattern of United States laws and regulations that are detrimental to expatriate United States citizens, including dual citizens.
The Secretary of State may issue a passport, in emergency circumstances or for humanitarian reasons, to an individual with a seriously delinquent tax debt, and may limit a previously issued passport only for return travel to the United States or issue a limited passport that only permits return travel to the United States.
A “seriously delinquent tax debt” is defined as “an unpaid legally enforceable Federal tax liability”:
- that has been assessed;
- that is greater than $50,000.
- A Notice of Lien has been filed or a levy is made.
“correspondence with U.S. tax authorities is far more complicated than for a resident of the United States…Deadlines can be missed through no fault of the filer, leading to penalties which only increase the tax debt.
To achieve its goals, the new law amends the Internal Revenue Code Section 6103 disclosure rules to allow the Internal Revenue Service to share with the State Department taxpayer identity and seriously delinquent tax debt data. For expatriates who previously wondered whether the consular officers at embassies and consulates who processed applications to renew or add pages to a passport were aware of their tax situation, the answer now becomes yes.
Although the intention of the passport revocation provision is to allow the IRS to identify and prevent the potential escape from the United States of individuals with seriously delinquent tax debts, as with other legislation such as the Foreign Account Tax Compliance Act, the provision can have a potentially devastating impact on citizens, including dual citizens, who reside outside the United States.
“since the enactment of FATCA, “tax debts” can now include large sums of which the individual is unaware, because of late, incomplete or incorrect filing
Business persons, diplomats and government officials in Hong Kong need to be aware of the latest in a pattern of United States laws and regulations that are detrimental to expatriate United States citizens, including dual citizens.
Loss of Identity Documents
For an overseas American, a valid U.S. passport is often the only means of identification valid for: establishing or maintaining residency in that person’s city of residence and employment; opening a bank account, obtaining a mortgage or other loan; registering in a university; obtaining a marriage license, and more. Losing one’s passport in a foreign country can deprive an individual of his/her civil status, leaving the person, in effect, stateless. For a resident of the United States, it represents only a means of leaving and returning to the United States (thereby potentially avoiding the tax authorities).
Inability to Return to Hong Kong
Passport revocation could mean losing the ability to travel to a place of employment outside the United States such as Hong Kong, where one’s home and family are. For others, it could mean missing a family funeral or wedding.
Inability to Access Personal Records
For an overseas American who is limited only to “return travel to the United States”, the challenges inherent in a tax dispute with the IRS could be exacerbated. Often, the expatriate’s tax records, correspondence with local tax authorities and the IRS, and access to financial accounts are in the jurisdiction of residence abroad, not in the United States, so that the individual would lose the ability to defend him/herself by, in effect, being trapped in the United States.
FATCA and FBARs – Unknown Liabilities
For an overseas American, since the enactment of FATCA, “tax debts” can now include large sums of which the individual is unaware, because of late, incomplete or incorrect filing of, for example, the Foreign Bank Account Report. Many expatriates are unaware of such obligations unless they are informed by the press or by organizations such as the Association of Americans Resident Overseas. Unfortunately, information provided by the IRS and Treasury Department to citizens abroad is dependent on the taxpayer knowing where and how to access it.
Challenges Inherent in Fighting a Claim
For an overseas American, correspondence with U.S. tax authorities is far more complicated than for a resident of the United States, due to the time required for international postage and to frequent mistakes in labeling of international mail. It is even possible that the IRS notice may never actually reach the taxpayer abroad. In some cases, it is the filer’s tax preparer who is informed of the problem, which may lead to further delays. Deadlines can be missed through no fault of the filer, leading to penalties which only increase the tax debt.
Cutbacks in Services for Overseas Filers
Overseas Americans have lost their last resources for receiving information and counsel from U.S. tax authorities, with the closing of IRS offices abroad and of the international helpline, alongside the reduction in the number of IRS agents available in America to handle incoming phone calls. Add to this the cost of trying to call the IRS from Hong Kong, and that of hiring the services of international tax attorneys. The average overseas American is very often ill-informed and cut off from resources far more readily available to the delinquent filer in the United States.
Given the uncertainties as to the application of this new law, overseas Americans must be prepared to spend additional time and/or professional fees to ensure they are tax compliant. Those concerned about data privacy and security breaches will be uneasy with the State Department now maintaining databases of tax payment data. Consular officials in Hong Kong, from all countries, should prepare for situations where their nationals who are resident in Hong Kong but enter the United States on a U.S. passport are unable to return to their jobs and families. Needless to say, this law signals a further assault on the rights of overseas Americans.
Ross Darrell Feingold is a commentator on business and political issues, and is on the board of directors of the Association of Americans Resident Overseas (AARO), a global advocacy organization for expatriate United States citizens. Mr. Feingold contributed this article in his personal capacity and the views expressed are his own and do not necessarily represent the views of AARO.