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Expats Who Owe Taxes Could Lose Their Passports

Dec 14th 2015
Freelance Business Writer
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Are Americans living in foreign countries in jeopardy of losing their passports? Though a definitive answer may be absent, the question has stirred up some contrasting feedback from tax and accounting professionals.

Yet one thing is clear: The ante could be high for longstanding delinquent taxpayers.

President Obama earlier this month signed a bill into law that enables the US State Department to revoke or turn down passports for Americans who owe more than $50,000 in federal taxes and are subject to a lien from the IRS. But that would not be applicable if the person owing the back taxes had reached a payment settlement with the IRS or is challenging the claim.

Nigel Green, CEO of the deVere Group, has said publicly that the 8 million Americans living overseas should “ensure their financial affairs are in order and compliant” before the new year or face having their passports revoked. Green's firm is among the world's largest independent financial advisory organizations with some 80,000 expatriate clients.

Americans abroad need passports to perform basic daily functions, like make bank withdrawals, rent a car, and register children in school. “Not having your passport overseas is equivalent to not having your driver's license in the United States,” says Peter Stratos, president and CEO of Stratos & Associates PLLC, an international tax advisory and consulting firm in Springfield, Virginia.

Americans facing the issue should not take it lightly because the new law is another tool the IRS and the State Department are serious about enforcing, Stratos says. The bill requires that taxpayers be notified by letter they owe taxes. But Stratos says problems can occur because the IRS system is not set up for comparability with foreign addresses. That means it could take expats two to three months to get notification, possibly giving then insufficient time to take corrective action to resolve the problem.

To help counter that, Stratos recommends Americans owing the taxes “take immediate action” by entering into an installment agreement. They also could opt to pay a percentage if the balance can't be paid off before a lien is filed. Collection is expected to start right away with the law in place.

The potential impact could be far-reaching. Stratos estimates there are only about 800,000 Reports of Foreign Bank and Financial Accounts, or FBAR, filings each year by Americans. Yet he says there is a significant gap of US folks living abroad and those actually doing the reporting. He notes a great number of Americans work overseas for US companies or foreign companies, many of them each making more than $150,000 a year.

Stratos estimates that penalties for the unpaid taxes might run 10 percent to 20 percent of the total amount owed, depending on how long the liability has been due.

With the passport provision now effective since Dec. 4, there are some key points tax practitioners should consider. David Kautter, partner in charge of Washington National Tax for accounting firm RSM US LLP, recommends tax advisors need to let their clients know now if they have outstanding federal tax debt of $50,000 or more, and if they plan on travelling abroad, they need to deal with their tax issues or they will not be able to travel out of the country.

He adds the same holds true if they are planning on sending an employee abroad on business. The employee needs to get their tax matters in order or they won't be able to get a passport. If they already have a passport, they won't be able to use it because it will be revoked.

For those businesses that already have employees abroad, Kautter says notifying them about the new rules is important because the employer often doesn't know about tax disputes their employees may be having with the IRS. “The last thing an employer needs is an employee abroad who cannot function because of a passport problem,” he adds.

But Ines Zemelman, president of Taxes for Expats in New York, believes the matter is a nonissue for the majority of Americans who live abroad. “The law only applies to people with over $50,000 in unpaid IRS debt,” says Zemelman. She is a tax expert with more than 25 years of experience in international tax preparation and oversees a team of tax advisors for Taxes for Expats, which has clients in 163 countries.

Zemelman adds that it is important to note that the new law could set a precedent. She says a potential next step could be to require documentation that one does not owe $50,000 to the IRS, which, hypothetically speaking, would require showing that one is compliant and current on their tax returns.

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