For this post, I am happy to republish a recent blog by Virginia La Torre Jeker, J.D. ([email protected]) my able colleague on the ACA Professional Tax Advisory Council who writes about increased efforts on the part of the State Department to check with the IRS before they issue a passport.
Noncompliant US taxpayers living abroad are getting nervous. If an informant seeking a hefty IRS reward, or FATCA doesn’t rat them out first, then the State Department will. This can happen when the noncompliant taxpayer renews his US passport.
Traditionally, the functions of the US Treasury and the Department of State were completely separate. However, we are seeing a continued erosion of this distinction as troubling economic times continue. The US passport renewal form mandates that the applicant supply his Social Security Number (SSN) if he has one. http://www.state.gov/documents/organization/79960.pdf
This is authorized by Internal Revenue Code Section 6039E, enacted in 1986. The legislative history to that section makes clear that over 25 years ago Congress was aware that US persons residing overseas were not filing US tax returns even though required to do so. Congress intended to increase tax compliance of US citizens living outside the United States through its enactment of this tax provision. The IRS has continued to drag its feet in promulgating Treasury Regulations that can offer more guidance. Recently, the IRS has renewed its interest in the topic. In January of 2012, the IRS withdrew old proposed Regulations that had been issued in 1992 and issued new ones dated January 26, 2012. We are still waiting for these Regulations to be finalized over one year later!
Regardless of how slow the IRS is moving on the Regulations project, make no mistake about it, the statutory provision is being enforced. A $500 penalty applies for failure of a passport applicant to provide the SSN, unless reasonable cause can be established. In addition, the State Department MUST turn over to the IRS some damning information from the application – the statute mandates that it must provide your SSN and foreign residence information to the Department of Treasury. If you refuse to submit the SSN, the State Department MUST still provide your identifying information to the IRS indicating you have refused to give the information. So, you lose either way – whether you reveal your SSN on the passport form or refuse to do so, the IRS will be made aware of you and can commence its investigation into your tax compliance history.
SOLUTION? Get into tax compliance now – at least before you need to renew your US passport.
Delinquent taxpayers should seek qualified tax advice from a US taxation attorney and discuss the risks and tax issues associated with the various options to remedy their situation. They should learn about the IRS Voluntary Disclosure programs and working under attorney-client privilege (which is not available with an accountant) and then arrive at the best solution given their particular facts.
Various options are available to remedy the situation. For example, some taxpayers decide to file the late tax returns and / or FBARs by a so-called “quiet filing” or “quiet disclosure”. This choice carries its own set of risks. Other taxpayers decide to enter a Voluntary Disclosure program. Other taxpayers may qualify for a “Streamlined” correction of delinquent filings. All of the possible options should be thoroughly examined with a US tax attorney.