IRS gains power to revoke tax scofflaws' passports
The Department of the Treasury and the IRS can authorize the State Department to take away U.S. passports from individuals with seriously delinquent tax liabilities.
It might be wise to pay your overdue income taxes before packing for that European river cruise.
A new enforcement provision passed by Congress and signed into law earlier this month allows the government to revoke the passports of seriously delinquent tax scofflaws — people who owe more than $50,000 to Uncle Sam.
"You could be on your honeymoon and they could revoke your passport," said Tom Wheelwright, a certified public accountant and chief executive officer at ProVision Wealth Strategists in Tempe, Ariz.
Some details still need to be worked out, but the new passport rule indicates the government wants to get serious about collecting unpaid tax debts. The IRS reported 12.4 million delinquent accounts owing nearly $131 billion in assessed taxes, interest and penalties in 2014.
In addition to going after delinquent taxpayers by revoking their passports, the FAST Act highway-transportation bill signed by President Obama on Dec. 4 also gives private debt collectors a shot at forcing taxpayers to make good on their debts. The act includes a mandate that the Internal Revenue Service turn over certain unpaid tax delinquencies to private debt collectors.
The passport-revoking provision allows the Department of the Treasury and the IRS to authorize the State Department to take away U.S. passports from individuals with seriously delinquent tax liabilities. That's defined as those greater than $50,000 and for which the IRS has filed a lien or levy, according to Matthew D. Lee of law firm Blank Rome. In a blog, he described the passport-revoking provision as a "powerful tool to force tax compliance." Affected taxpayers would receive written notice.
The State Department is now authorized to deny, revoke or limit use of a taxpayer's U.S. passport, and it isn't supposed to issue a passport to anyone owing that much money (with exceptions for emergencies or for humanitarian reasons). Americans out of the country when their passports are revoked may be allowed to return home.
The number of valid U.S. passports has surged in recent years, from roughly 30 million in 1995 to 126 million this year.
The new provisions wouldn't affect taxpayers who already have entered deals with the IRS to pay their tax debts, such as installment agreements or offers in compromise. Also, passports wouldn't be revoked for people who are seeking hearings or who are claiming innocent-spouse relief, according to Lee.
Wheelwright views the $50,000 limit as low, adding that it wouldn't take much to accumulate that much debt if a person lost a job or incurred big medical bills. It doesn't help that it's getting more difficult for people to contact the IRS, which is answering only about 40% of telephone calls from taxpayers, he said. Even tax professionals are looking at average phone waits of about 90 minutes, he said.
On the other hand, many of the people likely to get their passports revoked have been ignoring their tax obligations. An individual typically would receive three or four IRS notices over three to six months before getting to the collections stage, Wheelwright said.
Many of the people with severely delinquent accounts are U.S. citizens who live in other nations, said Mark Luscombe, principal federal tax analyst at researcher Wolters Kluwer in suburban Chicago. Some have dual citizenship and might not worry about losing their U.S. passports. "They feel they can ignore a tax problem for a while."
An IRS spokesman said the agency is reviewing the new law and taking steps to implement the program "as soon as feasible."
Congressional analysts expect the passport-revocation rule to raise about $400 million over the next 10 years, said Luscombe. That's less than the expected revenue from the new rule mandating non-IRS debt collectors. That's expected to bring in $4.8 billion total over the next 10 years, or around $2.4 billion after private collectors take their share, Luscombe said.
Private debt collectors would be called in on "inactive" tax delinquencies. "This means that the IRS has already tried to collect and failed because they couldn't locate the taxpayer or they deemed it not worth their time," Wheelwright said, adding that only those tax liabilities outstanding more than a year would be outsourced. The new rule carves out various debt-collecting exceptions, such as for minors with big tax bills as well as innocent spouses and military personnel in combat zones.