After much anticipation, the US government now has the power to revoke the passports of US citizens who owe money to the IRS. This law is especially relevant for US expats because they use their passports more than the average American and many expats find themselves in a category of people who owe taxes to the IRS. The IRS can already confiscate property of those individuals who owe taxes and they can bring criminal charges; however, this may not have been a worry for expats who are living outside the US.
The law requires that an individual needs to owe over $50,000 and the IRS must have already levied against or filed a lean on the property of the taxpayer. However, there are exceptions; if the taxpayer is already fighting the claim in court or if they have a payment plan in place, the law will not apply. While this amount is high enough to exclude many individuals from qualifying for this law, it is easy for interest and penalties to add up quickly for those who have not paid their taxes in a while.
The US is one of the only countries which requires all citizens to file tax returns, regardless of residency. Most other countries use a residency requirement, which mean that if a citizen does not live in the country or have taxable income from the country, then they do not need to file a tax return. However, the US has no such residency requirement.
Until now, many US citizens living abroad who were aware of the requirement to file chose not to do so because they did not see the consequences as harsh enough. However, now for the first time those Americans are faced with a real consequence – losing their US passport.
The US passport is by far one of the best passports in the world, and with only a few exceptions, will allow entry in to almost any country. So even if a US citizen has another passport, it is unlikely that this passport will allow access to as many countries as the US. In addition, a US citizen may have a US passport and a temporary passport from another country which has an expiration date.
For many, these new regulations are even worse than FACTA, which requires US citizens to report all foreign financial holdings and requires banks to report names of US account holders to the IRS. FACTA has been seen as very harsh, costly, and time consuming for both individuals and foreign financial institutions. Some foreign financial institutions have refused to do business with US citizens, which has led many US citizens to find banking abroad to be a nightmare.
These regulations are all part of the US’s effort to crack down on tax fraud and illegal foreign offshore bank accounts. While it has helped bring money back into the US, the little guys are the ones who are suffering. The English teacher living in Thailand or the expat wife living in England may now have trouble getting a bank account.
Some argue that the right to travel abroad is a right that every American should enjoy and the IRS should not have the power to revoke that right. There is already a law in place which allows the government to revoke the passport of individuals who owe child support. Most would agree that individuals should not be allowed to leave the country when they owe child support; however, most people do not think that this law regarding expats sounds fair.
The best course of action that any American who is not paying taxes should take is to file their taxes, back taxes and FBARs before they find themselves in a situation where they could lose their passport. The IRS has several programs in place to help delinquent taxpayers become current with their taxes and pay minimal penalties and interest. Entering into one of these programs and filing taxes now will prevent problems in the future.
Joshua Katz, CPA is the founder of Universal Tax Professionals, which specializes in helping Americans living abroad with all their tax and accounting needs. Joshua was born in Cleveland, Ohio and is now living in Europe. He worked at several large accounting firms until he realized he could provide clients better service at lower prices. Feel free to send him an email at firstname.lastname@example.org