IRS, State, and Passports

An American Expatriate walks into a US Embassy in a foreign country, to renew their passport... Not the beginning of a bad joke; the opening scene from a C-grade horror film...

After presenting their passport, the Expatriate is informed that State has revoked it. A heated discussion ensues (in which 22 USC 2714a and 26 USC 7345 play prominent roles). The gist:

  • The IRS has certified to State (under 26 USC 7345) that the Expatriate has a "seriously delinquent" tax balance (a tax assessment of $50,000 or more on which the Service placed a lien or levy); and

  • State is revoking the American's passport (under 22 USC 2714a) -- though they will "graciously" allow the Expatriate to return "home" on a limited passport that only permits return travel {26 US 2714(e)(2)(B)}

But, that's just the opening scene: State also notifies the host country's authorities that the Expatriate's passport is revoked. The host country revokes the Expatriate's visa. This has two direct and one indirect consequences:

  • Direct: The Expatriate is now an "illegal alien" living and working in the host country without permission.

  • Direct: In some countries (e.g. UK) owing a big tax bill (even to another country) implies the debtor is in possession of "proceeds of a crime." Needless to say, most countries won't admire the Expatriate for their "criminal enterprise."

  • Indirect: Either direct consequence makes the Expatriate persona-no-grata (or possibly a "criminal"). The Expatriate will often be asked to leave the host country - with various degrees of politeness depending on the jurisdiction.

Unless the Expatriate is a dual national (and has a passport from another country) there is nowhere the Expatriate can go except "home." Once home, they can't leave until they settle their tax issues. (If they are lucky enough to be stranded in a country where the IRS has a resident agent attached to the embassy they may be able to settle the issue without leaving for home.)

This scenario has a domestic counterpart: An American resident (in our practice, almost invariably a musician or performer) obtains work in a foreign country. The foreign country requires an entry-work-business visa. The American dutifully apply for the visa... and is turned down.

Subsequently, the American resident cancels their work engagements. After all, they can't get there. Lengthy breach of contract discussions - and arguments about whose jurisdiction applies - ensue. (NB: Even non-US legal representation is expensive!)

What can be done?

  • Concede the assessment - and pay it. (Usually not a viable option for large, old, and moldy assessments - but we thought we'd mention it anyway)

  • File the returns on which the IRS assessment is based: Big assessments, penalties, and interest result when the Service generates a Service Filed Return (SFR). The SFR is based on the Service's knowledge of the taxpayer's income. IRS doesn't know about business related deductions, basis in assets, or entitlement to credits or exclusions. If there are offsets the service didn't consider, filing a late, but accurate, return reduces the assessment significantly - often by enough to get below the passport revocation threshold.

  • Concede the assessment (in whole or in part) - and negotiate a settlement or payment plan. The Service reverses their certification to State if there is an Offer in Compromise (OIC) or Installment Agreement (IA) in effect for the assessment. This and the previous option are not mutually exclusive. If filing a return doesn't reduce the balance due by enough to get below the revocation threshold, an OIC or Installment Agreement can still bring relief.

Things that can't (or shouldn't) be done.

  • For Expatriates, "waiting out the statute" is usually not an option. The Service usually has "ten years" from the date of assessment to collect any tax due. Unfortunately for Expatriates, the running of the statute is suspended after the first six month they Expatriate. For Expatriates the statute for collections runs for ten years plus the time spent as an Expatriate, minus six months. For permanent Expatriates, the statute is effectively open ended.

  • For Non-Expatriates, "waiting out the statute" is an unpleasant option. The Service has passive/aggressive behavior down to a science. As the statute expiration approaches, they become more and more aggressive and resort to more stringent measures to collect the tax. Asset seizures and levies are the heavy artillery - arm twisting the light infantry.

  • Extend the Statute: Aggressive Revenue Officers (RO) sometimes "advise" taxpayers to extend the statute to avoid nastier consequences. This "negotiating tactic" has been forbidden for several years now - but occasionally an RO will run it up the flagpole to see if it still works. Taxpayers are not obliged to grant the extension. Talk to counsel if you are presented with this "option." Note, in the current context, extending the statute doesn't accomplish anything unless it is a "bargaining point" in abatement, OIC or Installment Agreement discussions. For passport revocations naked statute extensions merely prolong the agony.

The biggest No-Nos of All.

  • Do-it-Yourself: If confronted with this situation - get help from qualified representatives. International and multi-jurisdictional controversies are not a good arena for the inexperienced or the non-expert. This is especially true if the host-country considers tax debt to be criminal. Consult both local and US representatives.

  • Bad faith negotiation - or defaulting on an OIC or Installment Agreement. The reasons for this should be obvious to all but the most pathologically self-destructive. Default after negotiation (especially in this context) will get an Expatriate back on the IRS and State's bad-apples list so fast it will make their head swim. Simply put: Don't even think about it.


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