Consequences of the New Law
There are several things that are striking about the new law and, as of now, a lot of unanswered questions. The first thing of note is that “serious tax liability,” as defined by the statute, not only includes the tax, but also the interest and penalty associated with the account.
As anyone who has ever owed a tax liability will tell you, the interest and penalties associated with the account could be substantial.
Additionally, certain penalties such as “failure to file” penalties and the penalties associated with not disclosing foreign bank accounts are often in the tens of thousands of dollars. Failing to file a simple return and having the IRS assessing you for what they believe the balance is — coupled with penalties and interest — could land you on the passport revocation list pretty quickly.
Particularly concerning are payroll tax liabilities that are normally assessed against small business owners and corporate officers through trust fund liability assessments.The urgency surrounding the resolution of payroll tax liabilities might increase dramatically as a result because the liabilities tend to accrue quicker than in income tax cases.
What is also interesting about the new law is the carve-outs it creates for collections side remedies to the passport restriction list (installment agreements and hardship status designations), but does not offer similar carve-outs for Offers in Compromise.
It remains to be seen whether or not the government will consider a taxpayer who has submitted an Offer in Compromise (and is technically in compliance) part of those individuals who need to be placed on the passport revocation list because it appears reporting is discretionary.
Additionally, those taxpayers who miss their time limitations to file a Collection Due Process request and file an equivalent hearing request are not exempt under the new law. Perhaps most importantly, liabilities that have been assessed but are still under dispute, such as those going through an audit reconsideration or in tax court, also do not appear as an exemption.
Therefore, a taxpayer could still have a valid dispute with respect to their assessed tax liability, have an active challenge pending, and still have their passport subject to revocation.
Taxpayers Living Abroad
The practical issues of the new law also merit discussion. Expats and other U.S. nationals who reside outside of the United States have long complained about not receiving IRS correspondence or receiving it delayed.
In this case, a delay or not being notified about a pending IRS assessment, could create problems for them in the U.S. or in their country of residence.
A revocation of their passport could leave them stranded in whatever country they are in, or worse, subject to fines and deportation. The problems associated with challenging a domestic tax liability while abroad have also been well documented.
In certain countries, banking records in foreign languages and other issues could delay resolution of collections issues and potentially put the taxpayer at risk.
Possible Issues Arising From the New Law
Those outside the United States are not the only ones who are affected by the new law. Foreign travel for those with tax liabilities would be non-existent unless they are put back into compliance.
However, it is not just foreign travel that has the potential for being affected. The REAL ID Act that was passed in 2005 has now mandated identification standards for state-issued driver's licenses and other forms of ID. People who reside in those states that are not federally compliant will need their passports to board domestic flights, not just international ones.
Additionally, the FAST Act does not provide an exclusion for work-related travel and those taxpayers needing their passport to travel overseas will have problems if they have not gotten back into tax compliance.
Furthermore, disclosure to the employer that one of their employees has a significant tax liability could put the taxpayer’s job in jeopardy. Taxpayers with relatives in foreign countries, especially those caring for foreign relatives, would also have the potential to be significantly affected by the new law.
What to Do About the New Law
Since we anticipate complications getting people removed from the passport revocation list, the easiest thing that taxpayers can do is not get themselves put on the list in the first place.
A simple installment agreement is pretty much all that it takes to avoid scrutiny from the State Department. Those who have newly assessed liabilities can file a collection due process request and challenge the action before being placed on that list as well.
Although the law does not currently include a carve-out for Offers in Compromise, if this exception is created in the future, then a doubt as to liability Offer in Compromise might be a good way of keeping yourself off the list while still challenging the underlying liability.
Once on the list, putting yourself back in compliance using one of the prescribed methods is probably the fastest way off the list short of paying the liability in full. What is interesting about this is that compliance and passport implications are going to start factoring into tax practitioner decisions about how to handle matters.
If denial or revocation of a passport is going to be a major factor for the client, then a “compliance first” strategy might need to be adopted in the future.
In short, the FAST Act has raised the stakes with respect to the enforcement action that the IRS can take against taxpayers. Knowing the risks and what to do if you potentially come a target is extremely important.
How exactly this new law is implemented and enforced by the IRS remains to be seen but rest assured that many will be keeping a watchful eye on it as it develops.
If the likelihood that your passport may be revoked is high, then call us right away to schedule a consultation. In all honesty, the best way to avoid having your overseas travel privileges curtailed is to pay your tax liability in the first place. We have helped hundreds of taxpayers get out of debt to the IRS and we can help you, too.