Tax Planning

It’s (Almost) Official: Tax Debt = No Passport

The paragons of public virtue that make up the US Congress really, really want to crack down on tax cheats. Thanks to a highway funding bill about to head to President Obama’s desk, if you owe the IRS more than $50,000, you’ll lose your passport.

The idea of tying the right to travel internationally to tax collection dates from 2011. In that year, the Government Accountability Office (GAO) issued a report estimating that 224,000 of the 16 million Americans issued passports in 2008 owed $5.8 billion in federal taxes. To deal with this tax collection “crisis,” the GAO suggested Congress “consider taking steps to enable [the] State [Department] to screen and prevent individuals who owe federal taxes from receiving passports.”

While there are few things that both parties in Congress agree on, collecting taxes by whatever means necessary is one of them. And the GAO proposal to strip passports from US citizens who owe federal taxes proved popular on both sides of the aisle. Legislation to this effect was introduced in 2012, 2013, and 2014, but ultimately failed. However, the proposal now appears ready to become law.

Both the House and the Senate have enacted versions of a highway funding bill (H.R. 22) containing this provision that is now before a conference committee. It’s likely to hit President Obama’s desk later this month.

The bill sets up a mechanism to deny or revoke your passport if you have a "seriously delinquent tax debt." This is defined as a tax debt that exceeds $50,000 for which the IRS has filed a notice of lien or levy.

The Joint Committee on Taxation estimates this measure will raise $398 million in tax revenues over the next decade. That’s enough to pay for about 0.1% – one tenth of one percent – of estimated highway expenditures during that period.

In other words, the passport revocation measure has nothing to do with actually raising revenue. It has a lot more to do with showing US citizens “who’s the boss.” And the boss is not you.

If you’re a US citizen who lives overseas, this proposal is a potential catastrophe. Without a valid passport, a residence permit in another country in most cases will be revoked. And if you’ve ever lived outside your country of citizenship, you’ll find you need to present your passport in all sorts of situations, anything from renting an apartment to opening a bank account.

The US is virtually alone in taxing its non-resident citizens as if they never left. Yet, the procedures the IRS uses to correspond with overseas citizens are woefully inadequate. According to a recent report from the Treasury Inspector General for Tax Administration, “IRS data systems aren’t designed to accommodate the different styles of international addresses, which can cause notices to be undeliverable.” That means if you live outside the US, you might not even know you have a “seriously delinquent tax debt” until the State Department cancels your passport.

If you’re a US citizen who values your right to live outside the US or merely travel internationally, H.R. 22 makes it more important than ever to get a second passport. If you don’t qualify for a second passport by virtue of marriage or ancestry, it’s still possible to acquire one by making a contribution or investment to a handful of countries. In exchange, you’ll receive citizenship for life and a passport. The second-citizenship program of the Commonwealth of Dominica is the most affordable of these offerings, although there are at least six others.

It only makes sense to obtain a second passport, “just in case.”

Mark Nestmann

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