In 2015, Congress for the first time empowered the US State Department to deny or revoke passports to US citizens with ‘seriously delinquent’ tax debts owing to the IRS. Tax practitioners generally viewed the new law as draconian, and the Treasury Department’s Office of the Taxpayer Advocate even suggested that it infringed on Americans' constitutional right to international travel.
Yet these critics also expected (or at least hoped) that the State Department's new power would be used sparingly; many observers predicted that the authority would be invoked only against the most brazen, 'worst-of-the-worst' tax cheats. Over the past year, however, it has become clear that the IRS intends to recommend refusal or revocation for virtually any US citizen who meets the relatively low legal bar for such treatment.
A tax debt is treated as ‘seriously delinquent’ if it (i) in the aggregate, exceeds $50,000 (ii) has been ‘assessed’ (generally meaning that the IRS has determined it is final), and (iii) has been the subject of certain IRS collections actions. A debt is not considered to be ‘seriously delinquent’ for this purpose if it is currently being paid under an IRS instalment plan. A debt that is being adjudicated in certain IRS administrative proceedings may also escape the definition of 'seriously delinquent.' In addition, only tax debts, including interest and penalties, count against an individual's $50,000 threshold; penalties imposed under non-tax statutes, such as Foreign Bank Account Reporting (‘FBAR’) penalties, are ignored.
The legislation authorizes the IRS to ‘certify’ a US citizen’s seriously delinquent tax debt to the State Department for further action. Upon receiving a certification, the State Department must—except in narrow circumstances—refuse to issue a new passport to the relevant person. The State Department also has discretionary authority to revoke a certified individual's existing passport. In most cases, an individual will have no prior notice that the IRS is in the process of certifying his or her seriously delinquent tax debt to the State Department—notice will be contemporaneously mailed to the individual, after the decision has already been made. If an individual's passport is revoked while he or she is travelling or residing in a foreign country, the State Department may issue a special passport to that person which is valid only for return travel to the United States. The IRS can in theory reverse a prior certification, but again only in limited cases. Crucially, once the IRS issues a certification to the State Department, that individual generally must pay the entire amount the debt in order for the individual’s entitlement to a passport to be restored (as opposed to the minimum amount necessary to reduce the debt below the $50,000 threshold).
While the 2015 law technically gives the IRS discretion to issue or decline ‘seriously delinquent’ certifications to the State Department on a case-by-case basis, the IRS’s internal employee manual permits IRS personnel to choose not to move forward in such cases only in relatively narrow circumstances—for example, if a taxpayer is currently bankrupt, has been a victim of identity theft, or is located in a disaster zone.
Consistent with this guidance, the IRS announced earlier this year that it intends to issue ‘seriously delinquent’ certifications to the State Department on a weekly basis throughout 2018 covering 5-10 percent of those citizens who already meet the $50,000 threshold. This approach is substantially more aggressive than had been anticipated when the legislation was first enacted, and suggests that any US citizen who may meet the legal criteria for certification should take immediate action to prevent unpleasant consequences. For example, a US citizen residing in the UK could, without prior notice, have his or her passport revoked while passing through the airport on a business or personal trip to the United States. At that point, the individual would in most cases be unable to return home to the UK until he or she fully expunges his or her debt to the IRS. While the new rules may not survive a constitutional challenge, US citizens—particularly those living abroad—simply cannot afford to wait for this process to play out. Any US citizen who thinks they may meet the criteria for certification should seek professional advice at the earliest possible juncture to explore the variety of ways in which they may be able to come into US tax compliance.