IRS Passport Revocation for Unpaid Tax & Expats

IRS Passport Revocation for Unpaid Tax & Expats

IRS Passport Revocation for Unpaid Taxes

IRS Passport Revocation or Denial for Unpaid Taxes:  In recent years, the IRS has increased enforcement of tax matters involving international and offshore related compliance. A few years back, the IRS introduced the revocation or denial of passport rules. Out of all the ridiculous things the IRS can do to try to goad taxpayers to get into compliance, the idea that they would move to revoke a person’s passport for a tax debt (that may stem solely from the confusion about whether a tax filing is even required) is ludicrous. What makes the law so absurd is that in many cases, the tax debt should not even really exist. That is because with many expatriates who reside outside of the United States, they are not aware that they have to continue filing tax returns. As a result, the taxpayer may be stranded due to no fault of his own.

Example of Unfairness of IRS Passport Revocation to Expats

Kevin is a US Citizen who now resides outside of the country as an expat. In the foreign country Kevin resides, he earns wages and pays tax to that country. When Kevin arrived overseas, he met a few friends through an expat organization. This organization turns out to be a tightly knit group of US citizens who reside overseas but have not officially expatriated. They enjoy having the “blue passport” and while they no longer reside in the United States, they have not formally expatriated.

Kevin Gets Bad Tax Information

Kevin asked the group about US tax filing requirements. The members confirm with Kevin that since Kevin is under the Foreign Earned Income Exclusion (FEIE) amount, he does not have to file taxes because he would not owe any tax. This seems logical, so Kevin does not conduct any further research. Plus, Kevin is paying taxes to the foreign government in the jurisdiction he works in, so it’s not as if he’s a tax cheat.

Claiming the Foreign Earned Income Exclusion

We have represented international clients and expats for many years and this is a very common misconception — that when a Taxpayer earns less than the FEIE amount, they do not have to file tax returns. This is incorrect. In fact, while Kevin would absolutely qualify for the foreign earned income exclusion, he must claim the exclusion in order for the IRS to know about it. In other words, in order to meet the FEIE exception, Kevin must first claim the exclusion on his tax return using Form 2555. Otherwise, how is the IRS going to know about it?

Last Known Address & Substitute for Returns (SFR)

Kevin has not lived at his former southern California address for many years. The home he used to rent has since been sold, and any mail that is addressed to “Kevin” is put back in the mailbox by the current owners.   The IRS has not received any tax returns from Kevin, so they begin filing SFR on his behalf. An SFR is a Substitute for Return and since the IRS has no idea that Kevin resides overseas and qualifies for the foreign earned income exclusion, they do not claim it for him (not that they would anyway) on the SFR. Based on the SFR, Kevin owes the IRS more than six figures for the last seven years that he has not filed. In addition to penalties and interest, the IRS sent the Kevin a Notice of Lien/Levy to Kevin’s former Socal address — but never received a response.

Kevin Heads Home for His Sister’s Wedding

Kevin has not been back to the United States for many years but is excited because his baby sister is getting married. He gets all gussied up in his best tuxedo and rents a nice hotel room on the coast in Santa Barbara. As he makes his way to the airport he waves off his friends and goes to check in. At check-in, Kevin (sadly) learns that his passport is no longer valid, as it’s been revoked by the IRS — and Kevin misses his sister’s wedding. In conclusion, it is important for taxpayers residing overseas to be aware that the US still requires all US persons to file tax returns and report their worldwide income. This is true, even if the taxpayer resides outside of the United States, unless they have formally expatriated. While Kevin would qualify for the foreign income exclusion and not owe any US Tax — because he has not filed any returns the IRS in many years, the Internal Revenue Service is unaware and as a result his passport had been revoked. While he can get the passport back, it will take significant time and resources. All of this could have been avoided if he just filed his tax returns and claimed the FEIE. 

About Our International Tax Attorney Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS disclosure & compliance to avoid IRS Passport Revocation of unpaid tax debt.

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