Starting this month, the Internal Revenue Service (IRS) will notify the U.S. Department of State (State Department) that an individual has a “seriously delinquent tax debt.” The result of this notification is that the State Department will generally deny an application for issuance or renewal of a U.S. passport from the seriously delinquent taxpayer. The State Department may also revoke or limit a passport previously issued to the taxpayer.
Who Is Impacted?
Taxpayers impacted by this law are those with a seriously delinquent tax debt. A taxpayer with a seriously delinquent tax debt is generally someone who owes the IRS more than US$50,000 in back taxes, penalties and interest for which the IRS has filed a Notice of Federal Tax Lien and the period to challenge it has expired or the IRS has issued a levy.
The IRS will notify the taxpayer that it has alerted the State Department to the taxpayer’s seriously delinquent debt. What if the taxpayer does not have the money to pay the IRS?
The taxpayer should not ignore her debt to the IRS and hope the IRS does not notice her amongst the many other delinquent taxpayers.
There are several ways taxpayers can avoid having the IRS notify the State Department of their seriously delinquent tax debt besides making payment of the tax debt in full. However, the employee should consult with an experienced tax attorney or tax CPA to determine if these options apply to her.
If the taxpayer pays off the debt, the debt becomes unenforceable, or debt ceases to be a seriously delinquent tax debt, the IRS will notify the State Department. The State Department will then update the individual’s record at the State Department.
Detrimental to the Company
Revocation of an employee’s U.S. passport can have a significant adverse impact on the business. It would be embarrassing for the company to explain that a key member of the sales team is unable to close a deal in person because her passport has been revoked. Similarly, it would be demoralizing to a foreign subsidiary to hear that the deployment of their new American general manager has been cancelled because she did not manage her U.S. taxes.
Human Resources Training
On the immediate front, corporate human resources departments should consider alerting employees of their obligations to stay current with their U.S. taxes. For longer term planning, human resources should provide training to both U.S. citizens and non-U.S. citizen employees engaged in international business travel or overseas deployment.
The training should not only include the current pressing issue of U.S. passport revocation but:
The Foreign Bank and Financial Accounts Report (FBAR)
IRS Form 8938 Statement of Special Foreign Financial Assets
Foreign Account Tax Compliance Act and IRS Form W-8BEN
Common Reporting Standard and Self-Certifications
Employees need to gain a basic understanding of these topics as they are being inundated with form requests by employers, financial institutions and the U.S. government.
For specific individual employee tax concerns, human resources should provide the employee an opportunity to speak to the assigned ex-pat tax preparer. Human resources may also consider providing contact information for the American Bar Association (ABA) and American Institute of Certified Public Accountants (AICPA).
For assistance, please contact me via my contact page or at elizabeth@elizabethmcmorrowlaw.com.