Publications

HOW YOU CAN LOSE A PASSPORT DUE TO TAX DEBT

If you owe enough in delinquent American federal taxes, the U.S. government can take your passport. The Internal Revenue Service certifies “seriously delinquent” tax debt to the U.S. State Department. This is an individual's unpaid, legally enforceable federal tax debt, including interest and penalties, that totals more than $55,000 (that amount is adjusted yearly for inflation).

The State Department generally will not issue a passport to you after receiving certification from the IRS, denying your passport application or revoking your current passport. If you’re overseas, the State Department may issue you a limited validity passport good only for direct return to the United States.

How you’re informed
The IRS will send you when it certifies your to the State Department. (The IRS will send the notice by regular mail to your last known address. Your power of attorney will not receive a copy of the notice.)

Before denying a passport, the State Department will hold your application for 90 days to allow you to resolve incorrect certification issues, or to make full payment or arrange a payment plan or with the IRS.

The IRS may also ask the State Department to revoke your passport if you promise to pay then fail to – or if could use offshore activities or interests to resolve your debt but choose not to. Before doing so, the IRS will send you Letter 6152 asking you to call the IRS within 30 days to resolve your account to prevent this action.

If you're leaving soon for international travel, the IRS will expedite reversal of your certification to the State Department, generally from 30 days to as few as nine. You’ll need to inform the IRS that you have travel scheduled within 45 days or that you live abroad – and you must provide proof of travel showing location and approximate date of travel or time-sensitive need for a passport and a copy of the letter from State denying your passport application or revoking your passport.

You can file suit in the U.S. Tax Court or a U.S. District Court to have the court determine whether the certification is erroneous, or whether the IRS failed to reverse the certification when it was required to do so. If the court sides with you, it can order the IRS to notify the State Department that the certification was incorrect.

The IRS will send you when it reverses certification. This can occur when you pay off your tax debt or becomes legally unenforceable, it’s no longer seriously delinquent or the certification is determined to be erroneous. The IRS will make this reversal within 30 days and notify the State Department.

The IRS will not reverse certification if your request for a collection due process hearing or innocent spouse relief is on a debt that’s not certified. The agency also won’t reverse the certification because you pay the debt below the threshold.

Not all debt triggers this problem, though – and in fact, you have several options for avoiding this situation.

The Internal Revenue Service certifies what it calls “seriously delinquent” tax debt to the U.S. State Department. This is an individual’s unpaid, legally enforceable federal tax debt, including interest and penalties, that totals more than $55,000 (that amount is adjusted yearly for inflation). The debt can include U.S. individual income taxes, Trust Fund Recovery Penalties, business taxes for which you’re liable and other civil penalties.

The State Department may deny your passport application or revoke your current passport. If you’re overseas, the State Department may issue you a limited validity passport good only for direct return to the United States.

Escape clauses
The IRS does not automatically send all debt to the State Department, however.
Some tax debt isn’t even included in seriously delinquent tax debt – significantly, the Report of Foreign Bank and Financial Account (FBAR) penalty.

Also not included:

• Tax debts being paid timely with an IRS-approved installment agreement or with an Offer in Compromise accepted by the IRS or a settlement agreement entered with the U.S. Justice Department;
• debts for which a collection due process hearing is timely requested regarding a levy to collect;
• debt for which collection has been suspended because a request for innocent spouse relief has been made.
• debts of those who have a request pending with the IRS for an installment agreement or with a pending Offer in Compromise or with whom the IRS has accepted an adjustment that will satisfy the debt in full.

 

There are still other ways out of the passport snare. The IRS will not certify anyone as owing a seriously delinquent tax debt who’s in bankruptcy; who’s identified by the IRS as a victim of tax-related identity theft; whose account the IRS has determined is not collectible due to hardship; or who’s within a federally declared disaster area.

The IRS will also postpone certification while an individual is serving in a designated combat zone or participating in a contingency operation.

 

Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.

 

---

A TALE OF TWO CITIZENSHIPS:  TAXATION OF AMERICAN CITIZENS WITH DUAL CITIZENSHIP LIVING ABROAD

          

  According to a recent New York Times article*, the current pandemic in the US has created an uptick in the number of citizens applying for dual citizenship in other areas of the world.  With a focus on Europe, the author of the article notes that the laws for obtaining citizenship in European countries are favorable to those descended even several generations from their original ancestor immigrants.  Nonetheless, individuals contemplating such a move are faced with many challenges and obstacles that need consideration.  Each privilege offered by dual citizenship has a corresponding responsibility.  Complying with two countries’ rules and regulations can be a daunting undertaking.  However, the better informed you are, the better you are able to effectively handle balancing simultaneous allegiances.  A thorough treatment of all the challenges posed by dual citizenship is well beyond the scope of this essay.  Addressed here are solely those tax issues dual citizens from the US need to consider while living abroad.
            Working and owning property in two countries creates extra tax reporting requirements.  The burden posed by double taxation needs to be weighed against the benefits of a second citizenship and residence.  If you consider that the time and outlay associated with your US tax burden is effectively now doubled, you realize that this is a lengthy and complex process.  Bound by the laws of two countries also means being bound by an obligation to pay taxes in two jurisdictions.  An international tax expert can prove to be of great assistance in this area since he or she would be aware of deductions, credits, and tax treaties to help lighten your tax burdens so as not to be overtaxed.  Irrespective of retained professional help, you still need to understand the complexities that being bound by the jurisdiction of two tax systems poses for you.
            The recordkeeping burden can be immense.  If you are travelling to and from the US, you need to divide the time spent in and out of the US for purposes of the foreign earned income exclusion and foreign housing deduction.  (In 2020, the exclusion is $107,600.)  It is vital to maintain a precise and all comprehensive travel calendar for your records.  This is because to meet the requirements for the exclusion requires qualifying for either the bona fide residence (BFR) test or physical presence test (PPT). 
US citizens who establish a bona fide residence abroad for a certain uninterrupted period that includes a full taxable year, while maintaining their tax home in the foreign country, can claim the exclusion.  Further, a dual citizen needs to reference the tax treaty between the US and their resident country because a nondiscrimination clause may exist that qualifies them for the bona fide residence test.  As such, a taxpayer who falls under this treaty clause can claim the benefits of the foreign earned income exclusion.  Parenthetically, a list of these countries appears in Revenue Ruling 91-58, 1991- 2 C.B. 340.  Further, uninterrupted does not necessarily require an actual physical presence.  This is because the taxpayer can make trips back and forth to the US as long as there is a clear intention to maintain the foreign residence.  However, factors such as the nature, extent, and reasons for the temporary absence from the foreign home are taken into account.
One’s intent is measured on a facts and circumstances case by case basis.  A bona fide residence does not include domicile, which is a legal word meaning fixed and permanent.  A dual citizen can therefore maintain a bona fide residence in the second country abroad while retaining domicile in the US.  Other factors considered are the presence of family abroad, whether the US home has been sold or is being rented, US and foreign social ties, and the status of the resident in the foreign country.  Since the dual citizen retains a passport in the resident country, he or she would not be hard pressed to prove intent and as a consequence, qualify for the exclusion.
Qualifying for the physical presence test may pose a greater burden to prove for the dual citizen if they travel back and forth to the US.  This is because the test requires residency in the foreign country for 330 full 24-hour days in a 12-month period.  It is almost definite that a person who obtains dual citizenship and moves abroad will remain there for the requisite period of time.  But it can be very easy to fail the test if the 330-day period is broken up even if the reason is for illness, family problems, a vacation, or an employer’s orders.
Dual citizens who become self employed in their second country may be under the false notion that they will be allowed to include self-employment earnings as income earned abroad to qualify for the earned income exclusion.  Yet, a dual citizen residing abroad and working as a freelancer, independent contractor, or sole proprietor still needs to pay for Social Security and Medicare taxes if earnings are $400 or more.  The main issue affecting the amount of the self-employment tax owed is the country of residence.  Deadlines differ greatly from country to country.  Self-employment tax rates also differ such that if you live as a citizen of United Arab Emirates you owe nothing, and in a country like Sweden your self-employment comes with a 40% tax bill.  It behooves a self-employed dual citizen to investigate whether a totalization agreement exists between the US and the resident country because in such an instance, there is allowance for the coordination of both countries’ social security and benefit payment tax provisions.
Another complicated aspect of moving abroad is the purchase of property.  In general, the purchase of real estate abroad is not a taxable event.  Additionally, an expat can deduct mortgage interest and points as long as the amounts are converted to dollars.  In purchasing the property abroad, a US dual citizen should consider exchange rates of the dollar and the local currency.  This is because money will go further in a country with a weak currency exchange rate against the dollar.  In coordinating the purchase of a property in the foreign country, it is best to retain a local tax expert to work with your tax adviser in the US.  In this way, a correct determination will be made whether such an ownership triggers a filing requirement and needs to have withholdings done.
As presented so far, it can be reasoned that the dual burden of taxation and its associated compliance requirements leaves room for errors.  To that end, the IRS has cracked down on persons holding US passports if they become seriously delinquent on their tax debt.  Passport confiscation can occur if the taxpayer owes more that $52,000 in back taxes.  If a dual citizen should forget to report their foreign accounts by not filing a form called the FBAR, there is the potential to be penalized $10,000 for each violation.  The extra compliance burden for a dual citizen requires a hyper-vigilance in maintaining a high level of acquiescence to both countries’ rules and regulations so as not impair citizenship status in either country.
By way of explanation, FBAR stands for Foreign Bank Account Reporting and was introduced by the Bank Secrecy Act of 1970 with the intent of discouraging tax evasion by taxpayers hiding of their assets overseas.  The form is filed with the Financial Crimes Enforcement Network if assets during the year at any given time in foreign bank accounts exceed $10,000.  Another form, entitled Statement of Foreign Financial Assets Form 8938, and in endearment referred to as the FATCA form which stands for the Foreign Tax Compliance Act, requires reporting of foreign assets to the IRS with the filing of the income tax return if the total value of those assets is more than $200,000 on the last day of the year or $300,000 at any point during the year for a single taxpayer living abroad, there are other thresholds to keep in mind and that is why it’s important you check with an expert in this area.
The precarious time we are experiencing during this pandemic here in the US has prompted individuals to execute their plans to move abroad without further delay.  In making the move abroad, many US citizens are reluctant to give up their US citizenship while at the same time becoming a citizen of their resident country.  There is nothing intrinsically wrong in being the citizen of two countries and this is demonstrated by the fact that countries have allowances for just such arrangements.  Nevertheless, relocating within a global environment has associated logistical, legal, and tax complications that must be considered before making such a move.  The information presented here is a thumbnail’s sketch of the complexity international taxation poses for the dual citizen who is a US citizen and a citizen elsewhere.  Being informed and retaining experienced professional help are the steps necessary to not deter you from fulfilling a desire for global relocation.

Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.

 

Offshore Banking: Separating Reality from Fiction

Click here to read it in Spanish

 

Click here to read it in Portuguese

 

How many times have you watched a movie of covert espionage between spies of enemy countries wherein there is at least one scene involving transfer of funds to a secret Swiss banking account? In exchange for the disclosure of secret intelligence to the enemy, the spy expects a handsome deposit of money at a Zurich bank. Presumably, the spy has opened this account to avoid any paper trail sourcing funds to his country’s enemy. The secrecy afforded him/her by Switzerland’s banking laws places an obstacle to whomever among his/her own ranks is investigating his activities under suspicion of defection.

Plots like this make for interesting film, but hardly reflect reality. Gone are the days when US citizens, interested in evading their tax obligations, would deposit funds in offshore accounts located at banks throughout Europe and the Caribbean. The IRS treats money held in foreign banks differently than funds deposited at domestic banks. Recent history has shown a concerted effort by the Treasury as a matter of public policy in tracking these foreign accounts. The concern here is the lack of accessibility the Service will have to these accounts. As such, rules and regulations have been promulgated deterring such offshore banking practices.

Conversely, there has been a long-time trend wherein foreign banks have become wary of accepting US deposits. This reluctance evolved as a consequence of the increased demands made by the Department of Justice and IRS on foreign institutions to comply with US reporting requirements. There is just so much time and energy these banks can devote to complying with these laws. Further, not every foreign bank has the infrastructure to deal with such extensive compliance reporting requirements. As someone who is a US citizen subject to IRS taxation, you can become a liability to a banking institution such that it may even hesitate in marketing and providing its services to you. The best strategy then is to make yourself less of a risk by ensuring you have been in strict compliance with the law.

-----

FIRST CAME THE MOD SQUAD, NOW COMES THE WEALTH SQUAD: POST-OFFSHORE VOLUNTARY DISCLOSURE PROGRAM

 

Click here to read it in Spanish

 

Click here to read it in Portuguese

 

There was a popular American crime drama series broadcast in the late 60’s and early 70’s called the Mod Squad. The series focused on three disaffected youths given the choice of incarceration or of serving as undercover, (yet unarmed), detectives for the Los Angeles police force. Their term of service on the force would be in lieu of serving their time in prison. A popular series, it addressed topics that were important to the 70’s counterculture movement, a movement that was gaining in its popularity at that time in the States.

The IRS has recently formed its own squad to address another counterculture movement of sorts, i.e., high-income taxpayers. After having come under fire from critics in recent decades for fixating far too much of their efforts on auditing lower income taxpayers, the IRS decided to form a special investigative group that focuses on audits of high-income taxpayers. The official name of the group is the Global High-Wealth Industry Group. Practitioners in the tax industry have nicknamed it the Wealth Squad. Like the Mod Squad, it too has its own mission objectives. Their mission statement is “to take a holistic approach in addressing the high wealth taxpayer population; to look at the complete financial picture of high wealth individuals and the enterprises they control”. (IRM 4.52.1, Global High Wealth Program, Global High Wealth Program Processes and Procedures, Revised 12/26/2019)


Beginning in January 2017, the IRS announced a new audit strategy, known as “campaigns”, to be undertaken by the Wealth Squad via its Large Business and International division. The goal of the division was to improve the selection process of returns for audit, identify issues representing a risk of noncompliance, and make the greatest use of limited IRS resources. As of November 2019, six new issues were identified by the IRS as a focus for their campaigns. One of these issues is compliance with the post-offshore voluntary disclosure program (OVPD).

Alicea Castellanos, CPA, TEP, N.P.
CEO & Founder
Global Taxes LLC
Tax Advisory & Compliance Services