Americans Abroad: Welcome to the Hotel California: “You Can Check Out Any Time You Like But You Can Never Leave.”
Beware: Americans Thinking About Moving Abroad or Dropping Their U.S. Citizenship.
As the government looks for more ways to enforce the tax laws, a recent change allows the Department of State to deny or revoke a passport for anyone with a “seriously delinquent” IRS debt.  This change is noteworthy for the American abroad, as well as for those contemplating moving abroad or renunciation of citizenship.
The law is very clearly written and is easy to understand. Once the dollar threshold is met, all the IRS has to do is follow its normal procedures for issuing and protesting liens and levies. If the taxpayer fails to participate in the lien/levy protest procedures or the process goes against him, the IRS is all set! It has laid the predicate for the IRS to notify the Department of State of the delinquency and permits stripping a person of one of the most prized documents on the planet: a U.S. passport.
No one can fairly criticize the IRS for not giving people enough advanced notice that they have a tax problem. The IRS will customarily issue several notices asking the targeted taxpayer to respond to provide an opportunity to resolve the tax matter.
Beyond this, the IRS has no obligation to hunt you down if it believes you might owe more tax than you reported or if you haven’t filed for multiple years. The triggers which set off the events allowing the IRS to notify the State Department to pull someone’s passport are almost always computer-generated. There is absolutely no provision in the law which requires a real person (as opposed to a computer) to verify the prerequisites to meet the requirements for having what the law very specifically defines as a “seriously delinquent tax debt.”
It may be a good idea to make sure the IRS knows your “last known address”: In the realm of IRS compliance, remember all of the IRS notices are sent to what the IRS calls, and the law recognizes, a taxpayer’s “last known address,” a well-defined term of art which basically means the last address the IRS has for someone as shown on their last filed tax return.
The IRS doesn’t email, nor does it generally call its “customers” on the telephone. It has no obligation to hunt you down on the Internet through your Facebook, Snapchat, Marco Polo or Instagram account. All they have to do is copy the address they have from the most recent tax return you filed.
For those who have tangled with the IRS before, mail from the IRS becomes increasingly more menacing, the longer it is that the IRS does not receive a response. IRS notices start out looking like junk mail and then work their way up to certified letters. By sending these notices, the IRS will have done all it is required to do even if you don’t receive any of their letters.
A spat with the IRS may turn out to be the most significant economic event in a taxpayer’s life. While it may be counterintuitive to some, experience teaches that it is almost always better to contact and correspond with the IRS as early on in the process as possible. Defaulting critical notices, missing an opportunity to talk to the IRS before an assessment is made, or failing to correct the government’s obvious mistakes as soon as they come to light, can become a mistake a taxpayer ends up regretting later.
Here’s why an American should not leave the country with unresolved IRS issues:
I leave it to other patriots to answer the question of whether the punishment fits the crime where a person loses the right to travel on a U.S. passport because he has unresolved tax issues with the IRS. Agree with it or not. It is the law of the land.
There is also the issue of how the passport revocation law cuts with respect to the debate on Citizenship Based Taxation vs. Residence Based Taxation. At the end of the day this blog is surely nothing more than a tip on a smart business “best practice.”
Here is what could happen to some people:
There are many ways a taxpayer and the IRS can get sideways, especially when the source of the problem is a computer-generated notice based on incomplete facts, or an IRS error. Using a very simple “what if” scenario, assume the IRS commences a correspondence audit with a taxpayer who simply blows off all his IRS mail and moves overseas to take a job. Assume also that the correspondence audit ends up with the issuance of a Statutory Notice of Deficiency. Of all IRS correspondence, this is one of the real “drop dead” letters which a taxpayer ignores at his own serious peril. This is the letter which triggers a right to challenge the IRS before a tax assessment is complete, by filing a simple petition with the United States Tax Court. A timely response to a Statutory Notice of Deficiency gives the taxpayer a chance to tell his story to a relatively higher level IRS employee who has the actual authority to make a decision for the government, and, if necessary, to a U.S. Tax Court judge.
Assume the taxpayer never receives the Statutory Notice of Deficiency. The citizen is now living and working abroad and hasn’t lived at the old address for a while and so the “last known address” is no good.
A taxpayer has 90 days (or 150 days if addressed to a person outside the U.S.) to file a petition in response to a Statutory Notice of Deficiency. Once the taxpayer defaults because of a failure to file a petition within the allotted time, it becomes legal for the IRS to start issuing actual invoices requesting payment. A defaulted Statutory Notice of Deficiency allows the IRS to enter the liability on its books. This is called an “assessment.” The assessment in effect says,
Ok, you had your chance to explain why you shouldn’t be taxed based on what we proposed in our Statutory Notice of Deficiency, but you failed to do so. Welcome now to the world of IRS Collections.
This starts a whole new set of computer generated collection notices, as opposed to the pre-assessment notices where the IRS was open to challenges about whether or not a deduction was valid or not. The collection notices come with increasingly more menacing language with dire warnings which say if the taxpayer doesn’t start paying attention soon, the IRS will issue a notice of federal tax lien or final notice of intent to levy. Yet again, another series of required mailed notices begins with well-defined procedures to challenge the IRS on the merits of the IRS collection action, but with almost no ability to challenge the original assessment.
It doesn’t take long for the IRS to lose all patience with an unresponsive taxpayer and start the levy process, usually to administratively seize income and money in bank accounts. Let’s assume the IRS computer cannot find anything to seize in the taxpayer’s name in the United States. By this time, the IRS computer is smoking with anger about being ignored for so long. At this point, the IRS concludes that this taxpayer really needs to learn a hard lesson.
The new law then kicks in and a previously illegal disclosure to the Department of State is made.
Fast-forward to our hapless American abroad who tries to renew his soon-to-expire passport and learns the sad truth. He is on a computer-generated list which says his passport was revoked and no renewal is possible until he makes good on his duty as an American citizen to square his accounts with Uncle Sam.
True to form, the State Department says in response to a request for help from an agency of our government with a long, long history of saying, “I am so sorry. There is absolutely nothing I can do to help you,” declines the application or revokes the passport with the advice to “please take up the matter with the IRS.”
Some Americans abroad may choose to continue to blow off the matter if they are not reliant on the U.S. passport since it is still quite rare for a foreign government to carry out a seizure on behalf of the IRS.
For some Americans abroad who need a U.S. passport, this is a devastating blow. To some it is a mark of disdain and dishonor. To others, probably most people caught up in a mess like this, it presents a terrifying and very serious inconvenience with the potential to seriously interrupt their lives and business matters for the immediate future and consume almost all of their attention. The problem is that few things are resolved expediently with the U.S. government.
Welcome to the Hotel California. “You can check out any time you like but you can never leave.”