We have learned many great techniques for communicating during COVID which may have been previously handled through international business travel. We will likely retain some video conferencing after an effective vaccine is launched but we will also return to in-person meetings with international colleagues and business partners. When that day comes, will your employees be able to get through the airport check-in? Or will their passport have been revoked due to “seriously delinquent tax debt” owed to the U.S. Internal Revenue Service (IRS)?
The U.S. Department of State is responsible for issuing U.S. passports. However, the IRS communicates with the State Department including informing them of any U.S. citizen who has a seriously delinquent tax debt.
The result of this notification is 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. Limiting the passport means the State Department will allow your employee to return directly to the U.S.
Making demands on the State Department will not resolve the issue as all discussions regarding the debt (or the fact it is all a big mistake) must be conducted with the IRS.
What Is Seriously Delinquent Tax Debt?
The IRS considers a tax debt to be seriously delinquent when the taxpayer owes the IRS more than US$53,000 in back taxes including penalties and interest; and the IRS:
has filed a Notice of Federal Tax Lien and the period to challenge the lien has expired; OR
has issued a levy.
The surefire way to know the debt is “seriously delinquent” is upon receipt of an IRS CP508C Notice which provides the amount due, due date and how to prevent the State Department from denying, revoking, or limiting a passport. However, it is late in the game at this point because the IRS CP508C Notice is also sent to the State Department.
If your employee is posted outside the U.S., the State Department may receive the notice prior to the employee. The IRS sends the notice by regular mail to the last known address and does not send a copy to the power of attorney.
But She Is a Senior Executive!
Even if the employee needs the U.S. passport to retain her job which in turn she needs to pay off her debt, the IRS expects payment. Full payment is preferred but it may be possible to make an alternative payment arrangement to have the IRS CP508C reversed. If the employee seeks your guidance, the best response is: Talk to an experienced tax attorney or tax CPA.
Once the employee pays off the debt, the debt becomes unenforceable, or debt ceases to be a seriously delinquent tax debt, the IRS will reverse the certification within 30 days of the resolution and provide notification to the State Department. The State Department will then update the individual’s record.
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 a key member of the finance team is unable to close a deal in person because her passport has been revoked. (More embarrassing would be the failure to take care of one’s children: Unpaid child support of US$2500 or more also makes an employee ineligible to receive a U.S. passport.)
Similarly, it would be demoralizing to a foreign subsidiary to hear the deployment of their new American general manager has been cancelled because she did not manage her U.S. taxes. On the flip side, financial stress can adversely impact your employee’s performance.
To protect the company, a pre-employment credit check may be appropriate. Where permitted by law, some employers do a credit check before hiring a new employee. In the U.S. when a potential employer runs a credit check, they receive a credit report similar to a report the individual would receive except certain information which might violate employment laws is omitted. The report will show the candidate’s payment history, outstanding debt and available credit.
On an ongoing basis, the company should consider including debt management counseling as a benefit to employees. For specific ex-pat tax questions, 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).
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 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.
Come up with an educational plan now because the last thing the CFO needs is for a key member of her team to be a no show at an important international meeting.