Expats Beware -- Get Your IRS House in Order or Risk Passport Revocation
The IRS Passport Revocation Power
Congress recently gave the IRS the power to revoke or deny passports for delinquent taxpayers owing more than $50,000. Section 7345 of the Internal Revenue Code is entitled “Revocation or Denial of Passport in Cases of Certain Tax Delinquencies.”
So what does this provision mean for you if you have a tax debt with the IRS? It means that if you are an expatriate or a U.S. citizen living abroad, you need to aggressively work to bring yourself into tax compliance and stay off the list of those who owe $50,000 or more.
The new IRS power means that the IRS will most likely utilize every available means at its disposal to bring back money sitting overseas. Offshore accounts are the focus of much of the IRS enforcement effort. For one thing, offshore accounts are the link in the chain that the IRS thinks will lead to repatriation of the large amount of money that individuals and corporations are keeping overseas to defer or evade U.S. tax on that income.
U.S. citizen taxpayers living abroad represent a significant chunk of the 150 million Americans in the labor force. At seven (7) million, citizen taxpayers living/working abroad make up about 5% of the labor force. Some are expatriates, some were born overseas and have returned, and some work abroad for American companies that have fled the hostile tax environment within the territorial U.S.
One estimate is that the new provisions will raise $398 million in tax revenues over the next ten (10) years. There are approximately seven (7) million taxpayers living abroad who depend on their passports to do everyday activities like opening a bank account, checking into hotels, and as proof of identity for getting other forms of identification. Ostensibly, these same individuals have hundreds of millions of dollars sitting in foreign accounts.
The IRS efforts to target this small group of the tax paying population have been public and increasing. IRS efforts to go after Swiss banks to require them to disclose the identities of their depositors has been the subject of much media attention, and the end of Swiss bank secrecy has dramatically affected the fortunes of many wealthy Americans who valued their financial privacy and secrecy. At least ten banks in Switzerland were specifically targeted by the IRS for criminal violations for assisting taxpayers in avoiding paying U.S. tax on their income. India/Israel have recently come under IRS scrutiny as well. The Foreign Account Tax Compliance Act (“FATCA”) has had far reaching consequences. Among other things, FATCA seeks to enforce the 30% withholding tax on foreign earned income by U.S. citizen taxpayers.
In 2013, U.S. Treasury Department data suggested that relinquishments of U.S. passports up 220%. Many U.S. citizens living abroad see little benefit in continuing their citizenship, and much risk. Costs for expats and other citizens living abroad have skyrocketed. The penalties for FBAR non-compliance, as just one example, are so staggering, that the need to carefully attend to these matters is great, and the concomitant cost to navigate all of the byzantine laws that apply to citizens living abroad is also great. Mixed families of citizen/non-citizen, who must straddle international tax regimes, are particularly subject to being disadvantaged by the byzantine system they are accountable to. Do such families have joint bank accounts? Will this subject them to reporting requirements in one or more tax jurisdictions? What if income is earned in two different tax regimes? Will that subject a joint return to multiple taxation? Must a family disclose the Foreign Bank Accounts of their non-U.S. citizen spouse on a joint return? Thorny questions for a time when the world is getting smaller, but the walls and the regulations dividing and controlling our lives are increasing at rates unseen in human history. Costs of compliance, and indeed the thorny issues of how one complies, are staggering.
It is no wonder that in 2015, a record number of U.S. citizens living abroad revoked their citizenship.
The takeaway from the new provisions of IRC Section 7345 are that overseas taxpayers should not wait to deal with a large U.S. tax debt of $50,000 or more, but should get tax representation and work to enter into an Installment Agreement or other Collection Alternative before they find themselves stranded abroad with no U.S. passport.
Call us for more information or to schedule a free consultation at (201) 529-8024.