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In case. you missed it, on Dec 3, the US Congress overwhelmingly passed the FAST (Fixing America’s Surface Transportation) Act and. onDec 4 President Obama signed it into law. For many Americans this could be even worse than FATCA. Buried in the law were two tax provisions that should make anyone dependent on their US passport shudder.
TAX PROVISIONS OF THE FAST ACT
Under the first tax provision of the FAST Act, the US Secretary of State is now permitted by law to deny a passport (or renewal of a passport) and is empowered to revoke the passport of any taxpayer identified by. theIRS as seriously delinquent. A seriously delinquent tax debt includes any outstanding debt for federal taxes in excess of $50,000 (indexed each year for inflation), including interest and penalties.
Under the second provision, the State Department is authorized to deny an application for a passport if the applicant fails to provide a social security number or provides an incorrect or invalid social security number. The passport can be denied or revoked if the incorrect or invalid number is provided willfully, intentionally, recklessly or negligently.
Here are some practical steps American taxpayers overseas (including domestic taxpayers and non-citizen spouses of Americans among others) should do to protect their freedom of movement and allow them to sleep well at night.
YOUR TAX RETURN IS COMPLICATED: CONSIDER GETTING HELP
If you’re a US taxpayer living outside the country or otherwise have non-US income or assets of any sort, don’t assume that the preparation of your tax return is easy and don’t assume that your tax preparer knows what they’re doing. (Note: we don’t do tax preparation.)
If you have any of the following, you might consider your return to be somewhat complicated: A foreign pension, non-US investment funds, ownership of a foreign financial account, a foreign inheritance, expatriate benefits from your employer, stock options, earned income more than $100,000 a year in a foreign country, foreign bank account balances over $10,000, foreign financial assets over $50,000, a non-citizen spouse, foreign life insurance, mortgage in a foreign currency, sale or rental of a real estate outside the US, self-employment income and more.
Each of the items above alone could easily – before the statute of limitations expires on your tax returns or FBARs – cause you to have a significant tax debt or penalties above $50,000 if reported incorrectly. The bottom line is that most taxpayers with these items can benefit from professional help or a deep understanding of tax regulations.
You want to make your absolute best effort to file your tax forms and foreign bank account forms accurately and on time each year and you want to hold your accounting firm to extremely high standards of quality and timeliness. If you have any doubt about your tax preparer’s competence (please don’t call us) you should search out a second or third opinion from a firm that specializes in US taxes for your particular situation (e.g. small business owners, tax payers resident in a certain country, corporate executives, etc.).
FILL OUT YOUR PASSPORT APPLICATIONS VERY CAREFULLY
It’s a US federal crime to enter or leave the country on anything other than a valid US passport, even if you have other nationalities. When filling out US passport applications for yourself, your children and other family members, you must double and triple check to make sure that you’ve entered the correct social security number.
Congress has not defined “reckless”: Is inverting the last two digits of your social security number reckless? If someone at the State Department thinks so, your passport may be denied. Or, if the application slipped through and your passport was issued, it could later be revoked if the IRS discovers the error.
HERE’S WHY THIS IS A BIG DEAL
If you’ve read this far and are wondering, “What’s the big deal? All of these overseas Americans just seem to complain about taxes, banking and how hard life is overseas. Why don’t you just move back home?”
Here’s the view of Charles M Bruce, an American lawyer with Bonnard Lawson in Lausanne, Switzerland, who advises American Citizens Abroad, a expat group: “The revocation or denial of passport provision in this bill is exactly the kind of tax legislation that drives Americans overseas crazy. It’s attached to a huge bill mainly dealing with a subject totally unrelated to the one affecting them. There were never any hearings at which they could present their views. No one seems to know who pushed for this legislation.”
He added, “No one seemed willing to take into account the fact that communications from the IRS to taxpayers living abroad sometimes go astray. Also, the ability for these taxpayers to resolve a collections matter, which has never been easy, has been made harder by the closure of IRS foreign officers”
Most US expats rely heavily on their passports to travel from one country to the next, as an identity document in their foreign country of residence and to be able to travel legally to and from the US. Giving the ability to the State Department to revoke a passport due to a certification from the IRS (which has been known to make a few mistakes over the year) has the very strong potential to break apart families for months at a time; prevent people from returning home to work and family; and prevent people from traveling for necessary medical services; and inflict severe financial hardship in terms of extra professional fees, travel costs, and such for the many weeks.
Thankfully, before passage, a congressional Conference Committee – influenced by the bipartisan congressional Americans Abroad Caucus and groups like American Citizens Abroad – inserted “a mechanism for the IRS to correct errors and take into account actions by a taxpayer trying to come into compliance, “ Mr. Bruce says.
Moreover, “the meaning of ‘seriously delinquent tax debt’ is spelled. outa bit more. Among other things, he adds, the text “…clarifies a seriously delinquent tax debt to permit revocation of a passport only after the IRS has followed its examination and collection procedures under current law and the taxpayer’s administrative and judicial rights have been exhausted or lapsed.”
The Conference Committee’s notes also describe circumstances under which the IRS commissioner should reverse a taxpayer’s status as “delinquent” and gives the IRS 30 days to implement this once a taxpayer has come into compliance or has taken the appropriate steps to start paying off the tax debt.
The most important takeaways from the conference notes are that you need to be notified of the debts by the IRS, you have considerable rights, and if you get into some serious trouble, a lawyer or tax account should be able to help you get things right with the IRS. The best thing of course is try not to let it get that far.