As if tax season weren’t hectic enough, the IRS will soon be adding another wrinkle to an already pressure-filled situation. Starting in January 2018, there will be a new law in effect that connects your passport to back taxes you may owe. In this post, we’ll discuss this new legislation’s overall implications and how it specifically affects Americans living abroad.
The FAST Act: Legislation Linking Your Passport and Back Taxes
In 2015, Congress passed the Fixing America’s Surface Transportation Act as a way of fund additional government spending on surface transportation without increasing transportation user fees like tolls. This last part of the act is important because the government came up with alternative (you could say creative) ways of generating the $305 billion in funding for the bill.
One of the ways the bill’s authors came up with was to empower the IRS with a new tool for collecting on substantial outstanding tax debts from individuals. Under the new Section 7345 of the Internal Revenue Code, the IRS will have the authority to certify an individual’s “seriously delinquent tax debt” with the State Department when the law is implemented early next year.
It’s the State Department’s involvement that links your passport and back taxes together. Once it receives certification from the IRS, the State Department is expected to deny new passport applications and potentially revoke your existing passport in certain situations.
You read that right: if you owe a lot in back taxes to the IRS, you may end up losing your passport until your debts are settled.
How the Process Works
Thankfully, the government’s decision to take your passport isn’t as cut-and-dry as it seems.
For starters, not everyone with back taxes owed will be at risk of losing their passport. Only those with debts exceeding $50,000 in back taxes fall under the IRS’s definition of “seriously delinquent” and are therefore at risk of certification.
When you’ve been marked as seriously delinquent on your taxes, the IRS is then required to notify you about their decision. While their determination will have already made it to the State Department, there won’t be any final decisions between your passport and back taxes.
Instead, you’ll first have 90 days to resolve any certification issues and/or make a suitable payment to the IRS. During this time, the State Department will hold your application and effectively give you a “grace period” to settle with the IRS. Most of the time, this type of settlement means a full repayment of the debts you owe, but there may be exceptions to the rule.
Once your debts have been settled with the IRS, the agency will submit a reversal notification to the State Department within 30 days. At that point, the revocation of your passport – or the automatic denial of your passport applications – will be lifted.
How This Affects Expats
For those living aboard, we understand how sensitive this topic can be because your American passport is key to your identity while living abroad.
Luckily, in most cases that we’ve encountered, many expats don’t owe substantial amounts to the IRS – and are not subject to this risky relationship between passport and back taxes – thanks to expat-oriented provisions like the Foreign Earned Income Exclusion.
Still, accrued penalties for late filed returns and late tax payments – not to mention penalties related to non-disclosure of foreign assets – can come into play. If you find yourself in a situation like this where you have penalties and/or late taxes owed to the IRS, it’s a really good idea to get caught up via Streamlined Filing (if you qualify) or the Offshore Voluntary Disclosure Program before your debts go deeper into “seriously delinquent” territory.
Ready to Get Caught Up On Your Late US Taxes?
Our expat-expert CPAs and IRS Enrolled Agents have particular expertise in helping US expats get caught up on delinquent taxes using the Streamlined Filing Procedures. Get started with us today and become compliant on your US expat tax obligation!