For starters, if you owe taxes, you should pay them. It’s the law. Not everyone who owes taxes, however, is a crook. People do make mistakes, and the U.S. tax code is complicated enough that errors can happen despite best intentions.
That’s why some people are troubled by a provision buried deep within the transportation bill passed by Congress in December 2015. The provision stipulates that if you owe the Internal Revenue Service (IRS) $50,000 or more in taxes and penalties, you could lose your passport – including the right to renew it when it expires.
About the New Law
It’s called “Revocation or Denial of Passport in Case of Certain Tax Delinquencies,” and it came about as a way to give the IRS yet another tool in its ongoing efforts to collect unpaid taxes and fines owed to the government.
The law increases the authority of the Department of State, which administers passports, to refuse to issue or renew a passport if the applicant owes money for child support or certain Federal debts. Now, owing taxes has been added to the list.
In 2011, the Government Accountability Office reported that approximately 224,000 people with U.S. passports owed the IRS an estimated $5.8 billion in taxes and penalties. This law attempts to put pressure on those individuals to pay up.
The new provision is expected to recover an estimated $398 million over 10 years, according to the Joint Committee on Taxation.
The law applies to all U.S. citizens, whether you are stateside or out of the country. If you are currently in the United States, you could lose your passport and be prevented from traveling abroad until the taxes and penalties are paid (or you are on a payment plan with the IRS).
If you are an expatriate living and working abroad, it could be much worse. The new law could prevent you from traveling to any country that requires a passport or conducting any business abroad that requires a passport.
Even if you don’t want to venture outside the country in which you currently reside, as an American abroad you often need your passport for other activities. These can include reserving a hotel room, purchasing alcohol, opening a bank account or even registering your child for school.
In other words, you can be required to produce your passport for just about anything that requires formal and legal identification when you are overseas.
The reason this law is problematic, especially for Americans living abroad, is that computing taxes overseas can be challenging. (For more, see How to Pay Taxes If You’re Overseas.)
For Americans residing in the U.K, for example, it is not unusual for a U.S. tax return to be 40 to 50 pages long. In addition, hiring a local tax preparer who understands U.S. tax law is difficult and expensive.
For these reasons, it’s not unusual for expatriate taxpayers to make mistakes. Mistakes with the IRS can be costly. The IRS can impose a $10,000 fine for each violation. A strict interpretation by the IRS could easily result in $50,000 or more in taxes and fines.
An Additional Problem
Another issue that critics worry about with the new law is that the IRS isn’t exactly known to be a bastion of efficiency. This includes notifying people they owe in the first place.
A federal watchdog unit, the Treasury Inspector General for Tax Administration, noted that although the IRS issued 855,000 notices of taxes owed to U.S. citizens living overseas in 2014, many were never delivered because “IRS data systems aren’t designed to accommodate the different styles of international addresses.”
Good News for Some
If you owe taxes in excess of $50,000, but happen to be abroad for humanitarian reasons, an exception may be granted that allows you to retain your passport privileges.
Another exception applies if you are signed up for an IRS payment plan or are in the process of legally contesting a tax case against you. See How to Negotiate Back Taxes with the IRS and Form 9465: Don’t Pay Your Back Taxes Without It.
The Bottom Line
Your first priority should be to avoid owing taxes and penalties to the IRS. If you regularly travel overseas, plan such travel or already live abroad, the new law presents an additional incentive to “get right with the IRS.”
If you do find yourself owing taxes (to the tune of $50,000 or more), get on a payment plan (or pay up) as soon as possible. If you believe you do not owe the fine, seek legal help and go to court.
Finally, do not worry about being “stuck” overseas. You can be granted an exception for “emergency or humanitarian circumstances, including issuance of a passport for short-term use to return travel to the United States by the delinquent taxpayer,” according to this new provision.