Some Americans may not pay taxes for a variety of reasons. They may think that they will not owe any tax and the cost to prepare the tax returns will be excessive  Others may know that they will owe taxes and try to avoid the tax liability by simply not filing a return. Whatever the reason, the consequences for not filing tax returns can be very serious—interest charges, penalties and even jail. One additional consequence that may not be well known – the IRS could stop you from travelling.

If you are an American who does not travel internationally, your thoughts might be…well, what is the big deal? I pay my taxes, and I do not really need a passport anyway and to travel to neighboring cities, I have my driver’s license that can be used for identification purpose.

This does not seem to be the case anymore. Congress enacted a pair of obscure laws, one in 2005 (The Real ID Act) which could make your driver’s license unacceptable as a method of identification and another in 2015 (Fixing America’s Surface Transportation Act (“FAST Act”)) that could revoke your passports.

The Real ID Act:

The Real ID Act of 2005 established federally mandated “national uniform standards” for driver’s licenses. State driver’s licenses that fail to conform to these standards are no longer valid for any federal “official purpose.” Examples of “official purposes” include boarding an airplane, buying a firearm, or even entering a federal courthouse.

Starting January 22, 2018, passengers who have driver’s licenses issued by a state that is not yet compliant with REAL ID will need to show an alternative form of acceptable identification for domestic air travel. Currently, many states are not compliant with the requirements of the Real ID Act. For a list of states which are already in compliance with or have an extension granted visit DHS’S REAL ID web page.

Starting October 1, 2020, every air traveller will need to present a REAL ID-compliant license or another acceptable form of identification for domestic air travel. A REAL ID-compliant license is one that meets and is issued by a state that complies with, the REAL ID Act’s security standards.

So what does all of this have to do with taxes? If your passport may be revoked for non-compliance and you live in a state that does not issue a ‘REAL ID’ compliant driver’s license, your options will be very limited for providing an acceptable documentation for air travel. This is where the new tax law matters. Not paying your taxes may affect your ability to fly within the US and internationally.

The FAST Act (Fixing America’s Surface Transportation Act)

On December 4, 2015, US President Barack Obama signed into law the ‘Fixing America’s Surface Transportation Act (“FAST Act”)’. This act added a little-noticed provision to the Internal Revenue Code 26 entitled, “Revocation or Denial of Passport in Case of Certain Tax Delinquencies.” which empowers the Internal Revenue Service (IRS) to work with the U.S. State Department to revoke or deny the passport of a taxpayer with a “seriously delinquent tax debt.”

Under the FAST Act, the Commissioner of Internal Revenue must certify a list of taxpayers with seriously delinquent tax debts to the Secretary of Treasury, who in turn will transmit the list of names to the Secretary of State.  Any individual on this list will be unable to obtain or renew his or her U.S. passport and is at risk of having the passport revoked. Additionally, the Secretary of State is permitted to revoke the passport of such individuals and may limit a previously issued passport (or issue a new limited passport) to such individuals so that it only permits return travel to the United States.

What does a ‘seriously delinquent tax debt’ mean?

A “seriously delinquent tax debt” is an “unpaid, legally enforceable Federal tax liability” which has been assessed and is over $50,000 with respect to which the IRS has filed a notice of lien or levy. The authority contained in the Tax code at 26 U.S.C. § 7345 is currently detailed on the IRS website with a notice that the IRS has not yet started to certify tax debt to the State Department, but will begin to do so in early 2017.

You might think that $50,000 is a lot of taxes to owe, so how far-reaching a situation could this be?

Unfortunately, what we are talking about may not be immediately apparent. It is not only the taxes owed but also penalties and interest that are considered towards the $50,000 threshold. You could argue on this saying, ‘I earn and I file my tax return on time. There is no way that I could owe IRS $50,000.’ But in reality, it is incredibly easy to ring up a $50,000 tax debt, especially if you include interest and penalties.

The US tax rules not only require you to file a tax return but also require you to file certain information forms declaring relevant tax information. For example, not filing certain US forms (FBAR, Form 8938, Form 3520, Form 3520-A, Form 5471 etc.) which you did not know you had to file.

The minimum fine for not filing your FBAR is $10,000. However, if the IRS decides that you willfully failed to file your FBAR, the penalty jumps to $100,000 or 50% of the account values, whichever is greater.

Inherit an offshore bank account from your great aunt in Italy that contains $10,000 and fail to report that account and the IRS can fine you up to $100,000 and now they can cancel your passport, too.

However, one should note that revocation or denial of one’s passport would only occur after the IRS completes its normal examination and collection procedures, including the issuance of a notice of assessment, and only after taxpayers have had the opportunity to exercise their full administrative rights to a fair hearing.  Before denying a passport altogether, the State Department will hold an application for 90 days to allow the applicant to “resolve any erroneous certification issues, make full payment of the tax debt, or enter into a satisfactory payment alternative with the IRS. The IRS will notify the State Department of the reversal of your certification within 30 days of the date the tax debt is resolved.

If you have any questions regarding compliance, contact us.

Sources:
The Fixing America’s Surface Transportation Act or “FAST Act”
REAL ID Frequently Asked Questions
Revocation or Denial of Passport in Case of Certain Unpaid Taxes