Canada: US Tax Update: US Passport Revocation Program Casting A Wide Net

US Tax Update: US Passport Revocation Program Casting a Wide Net¹

Concerned about the amount of unpaid tax debt and challenges that the IRS faces in collecting that debt, Congress passed the Fixing America's Surface Transportation (FAST) Act, which added Section 7345 to the Internal Revenue Code (the "Code") in late 2015. The FAST Act gives the IRS and the Department of State an enforcement tool to collect payment from US citizens who have "seriously delinquent tax debts" by linking passport issuance and renewal with payment compliance.²

Before such action is taken, taxpayers have several opportunities and about 32 weeks (often a year) to work with the IRS regarding arranging a good faith payment plan to satisfy a seriously delinquent tax debt.³ Should this prove to be unsuccessful, the IRS would then send a certification to the Secretary of State that the taxpayer has a seriously delinquent tax debt. The Secretary of State then allows an additional 90 days for such certified taxpayer to achieve some type of resolution of the tax debt with the IRS.⁴ It is not until after these preventative measures have taken the place that an endorsed certification for such individual is actioned by the Secretary of State, such as denial, revocation, or limitation of that individual's US passport.⁵"Seriously delinquent tax debt" is an "unpaid, legally enforceable federal tax liability of an individual" that

1. has been assessed;
2. is greater than $50,000 USD (adjusted for inflation)⁶and,
3. meets either of the following criteria:
   1. a notice of lien has been filed under Code § 6323, and the Collection Due Process (CDP) hearing rights under Code § 6320 have been exhausted or lapsed; or
   2. a levy has been made under Code § 6331.⁷

The certification can only be made on an assessed liability, which can be based on either a tax liability reported by taxpayers or a substitute return prepared by the IRS.⁸ Moreover, this campaign has been upheld in US federal district court in a case where a taxpayer unsuccessfully argued that the program was an infringement of his constitutional right to travel after the IRS determined the taxpayer owed $250,000 in federal tax and his passport was subsequently revoked.⁹

For US citizens living abroad, receiving timely notification of the certification may be a challenge, especially if the IRS does not have the taxpayer's new non-US address on record. The IRS started enforcing Section 7345 in early 2018. According to the Taxpayer Advocate Service, the IRS has sent almost 389,000 certification notices to taxpayers as of mid-2019.¹⁰ Not all certifications resulted in the revocation of passports. As of May 2019, the IRS had decertified about 100,000 taxpayers for a variety of reasons, the top three being taxpayers located in a disaster zone, taxpayers having a pending instalment agreement request, and certifications issued on taxpayers for whom the statutory period of limitations on collections had expired.¹¹ Nonetheless, the total number of individuals certified for denial of new passports or revocation of existing ones is significant, and the number continues to grow.

The IRS has temporarily suspended certifications in 2020 due to COVID-19. It is still not clear when the IRS will resume certifications.¹² The IRS, however, will not suspend certifications for individuals with open cases with the US Taxpayer Advocate Service though it is generally not pursuing certification for taxpayers acting in good faith to resolve their debt issues.¹³

While a seriously delinquent tax debt does not include all debts collected by the IRS (for example, assessments for failing to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)¹⁴ or unpaid child support obligations) for US citizens living abroad, there are numerous informational reporting requirements that carry significant penalties which can very quickly total over $54,000 (the 2021 inflation-adjusted threshold for a "seriously delinquent tax debt").¹⁵

As an illustration, the penalties for failure to timely file Forms 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and 3520-A, Annual Information Return of Foreign Trust With a US Owner are the greater of $10,000 or 5 percent to 35 percent of the gross reportable account.¹⁶ Since 2018, the IRS has had in place an enforcement campaign targeting 3520 and 3520-A compliance and this remains in force today.¹⁷ In our experience, this campaign has resulted in an automatic assessment of penalties for late-filed forms even when the taxpayer has made a voluntary disclosure with a reasonable cause argument under the IRS Delinquent International Information Return Submission Procedures (DIIRSP). The DIIRSP is often the only option for taxpayers who may not fit the criteria for the Streamlined Filing Compliance Procedures, which have US day count limits and require a minimum of three years of late-filed tax returns.¹⁸ It is important to note that abating the penalties for delinquent filing of Forms 3520 and 3520-A requires considerable effort and may require administrative appeals and potentially court action. The costs of these penalties may prove less than the time and fees required for an administrative appeal or litigation.

Unfortunately, many US citizens living abroad who may not owe any US tax may still unwittingly get caught by the passport certification program because of these penalties. Only to further exacerbate the problem, the law requires just two forms of notice to affected taxpayers: (1) a contemporaneous notice issued to the taxpayer at the time of the certification, or (2) reversal and language included in the taxpayer's collection notice.¹⁹ Generally, the contemporaneous notice is issued within days of the certification and does not provide US taxpayers living abroad with sufficient time to come into compliance before the IRS makes the certification and advises the taxpayer that the certification has already occurred.

For US citizens living abroad, information return penalties that may also lead to loss of a passport are two strong reasons to come into compliance as soon as possible. As always, our firm stands ready to assist you on your US immigration and tax obligations.

Footnotes

1 We previously published blogs discussing the new passport certification provisions. Given the relatively low threshold of tax debt required for certification, we emphasized the need for US citizens to file US tax returns correctly and annually no matter where they live in the world. This blog provides an update on implementation of the law and points out that, especially because of current IRS enforcement campaigns for international information returns with hefty monetary penalties, it is increasingly easy even for non-compliant US residents of high tax countries (who often do not owe US tax after they claim foreign tax credits on US tax returns) to be at risk of losing their US passports.

2 Section 32101, H.R. Res. 22, 114th Cong. (2015).

3 https://www.irs.gov/newsroom/update-on-passport-certifications-and-taxpayer-advocate-service.

4 Id. On average, taxpayer cases certified to the State Department have been delinquent for 6.9 years. Id.

5 FAST Act §§ 32101(a) (codified as Code § 7345(b)), 32101(f).

6 The $50,000 threshold is indexed for inflation. For 2021 a seriously delinquent tax debt includes liabilities of $54,000 and above. Rev. Proc. 2020-45.59.

7 FAST Act §§ 32101(a) (codified as Code § 7345(b)), 32101(f).

8 Code § 6020.

9 See Maehr v. US Dept. of State, 125 AFTR 2d 2020-1093 (DC CO), 02/28/2020.

10 Taxpayer Advocate Service — Fiscal Year 2020 Objectives Report to Congress — Volume One. The Treasury Inspector conducted an audit of the program's implementation in September 2019, and concluded that the enforcement campaign is successful and will it will likely remain in place for the foreseeable future. https://www.treasury.gov/tigta/auditreports/2019reports/201930068fr.pdf.

11 Id.

12 See IRS Notice 2020-50.

13 https://www.irs.gov/newsroom/update-on-passport-certifications-and-taxpayer-advocate-service.

14 FBAR penalties are asserted under Title 31 as a non-tax debt.

15 See supra note 6.

16 Code § 6677(a), (c)(1).

17 https://www.irs.gov/businesses/irs-announces-the-identification-and-selection-of-six-large-business-and-international-compliance-campaigns. See also https://www.irs.gov/businesses/large-business-and-international-compliance-campaigns.

18 Evidently, the Relief Procedures for Certain Former Citizens would also not apply to individuals with US passports as these procedures are available only to individuals who have renounced US citizenship within the past decade and owe less than a total of $25,000 in US federal income taxes for the six tax years ending in the year of renunciation.

19 Code §§ 6320(a)(3)(E), 6331(d)(4)(E), and 7435(d). Note that the IRS does not currently send a copy of the notice to any taxpayer representative on file so, if the taxpayer's address in the IRS system is not up to date, the notice may never be delivered.

Moodys Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients' special circumstances.