Thousands of Americans Will Be Denied a Passport Because of Unpaid Taxes
wsj.com
wsj.com
With this law, an erroneous IRS decision can limit passport issuance and international travel. Three letter agencies are probably salivating at the prospect of 'errors' in possible suspects. This just unjustly empowers the government.
It was pretty easy to resolve by paper for me, couple letters back and forth, but yeah it takes a while. Fortunately the IRS was good about it all.
I wonder though if they're still investigating (sending me letters and I am responding) if it counts as owing them as far as this law goes?
From what I remember from he letters provided by the IRS, if I'm responding with legit responses (I sent them the not correct paperwork a few times and they were still ok with that) they consider the matter in one phase, but if I'm not it goes to another phase. It would make sense (hopefully the law does) that provided I'm responding and the IRS is cool with my responses that I'm not subject to the law.... but if I'm not responding then maybe the law takes effect?
Ignore them? They drop the hammer pretty quickly.
Both operated pretty similarly, basically assuming we owed taxes unless we could prove otherwise (which is technically illegal since they have the burden of proof initially). They accused us with no proof, to intimidate us into handing over documents which they then used to build their case against us.
Lawyers and accountants only offered to "negotiate" installments as the only help they could provide (and charging $$$$).
In the end we won both times by researching the law, past cases, internal procedures, filing FOIA requests, gathering evidence and responding accordingly. In one instance they were being super unreasonable and unresponsive until we filed a request to go to court, at which point they became much more amicable and willing to "solve" our case.
INAL, but if I had to deal with this stuff from the beginning again, knowing what I know now, I would not hand over any documents until it gets to the point where they either drop the case or make a tax assessment that allows me to request to go to court. At that point they don't have anything, I have all the documents and I know I've done nothing wrong.
It's a stressful strategy to execute (nobody wants to have a tax agency going after them), but probably the cleanest.
I had the same thing happen once due to a clerical error by my employer's new payroll service. The IRS was actually quite helpful, and immediately put a hold on any penalties or extra taxes when I called and explained what happened.
1. Me, calls IRS: "Hey, this is wrong because ..."
2. IRS: "Ok, fill out this form and send it in"
3. Me: Fills out form and sends it in
4. IRS: Provides me a document saying I am all set
Probably about 3-4 weeks all said and done.
I was actually impressed with how painless it was and how friendly the people were. An audit is a different story.
> To be at risk of passport denial, a taxpayer must typically be subject to a lien, which advises creditors of a debt to the IRS, or a levy, which gives the IRS the authority to seize assets.
> Taxpayers typically aren’t subject to passport restrictions if they’re contesting an assessment administratively or in court, or if they have pending or current installment-payment agreements or offers-in-compromise with the IRS.
When FATCA was passed, it flipped a switch that automatically made tens of thousands of people around the world who have never set foot in the US into criminals by default since they'd never filed US taxes (the US has the only global taxation system in the world).
It sounds like those people who haven't spent the ridiculous sums of money on accounts/lawyers/etc needed to become compliant during the grace period will likely now have the threat of their passport being revoked held over their head.
I'm sure we'll see the already record-high numbers of people renouncing their US citizenship accelerate. BTW, the US also has the highest fee to renounce citizenship in the entire world, it costs $2,350 to not be a US citizen.
The absurdity of it all would be funny if it weren't so cruel.
The point is that the number sky rocketed from basically nobody to thousands of people because FATCA is such a draconian, terrible law.
In absolute terms, only about 3.5% of Americans even travel abroad each year let alone live abroad. We could put a wall around the entire country and refuse to let anybody leave and a majority of Americans would not care. A majority of American citizens don't even have passports in the first place.
The small minority of people who live and travel abroad perform a very important function for US industry and international relations. Making life more difficult for them for no good reason is bad for our economy.
Also, the discussions often focus on people who renounce their U.S. citizenship, but I rarely, if ever, see any on people who relinquish. And while the result with respect to U.S. citizenship may end up being the same for both processes, I understand that the treatment of the former citizen is often different based on the option selected.
Lastly, while the numbers may be small, we don't know the value of the wealth that they are taking with them. Could be little or a lot. And while yes, there are exit taxes, people with enough to lose will expend some energy to not do so.
[1] https://www.forbes.com/sites/robertwood/2017/06/12/more-amer...
Not exactly, Eritrea is another case.
Except Eritrea doesn't have a stranglehold on the global banking system like the US so it's basically a non-issue for Eritreans.
That sounds like a big deal, until you see how trivial the number is: 6,000 to 7,000 people per year, or 0.003% of US adults.
The US hands out about one million green cards per year. There are typically five million or more green card applications pending in a given year.
150x more immigrants become citizens every year, versus the number of people that renounce their US citizenship. The US could triple that number any time it wanted to.
Plus, I think at least part of the reason why airlines would be reluctant to board you is exactly that - knowing that the destination country wouldn't be happy with them dropping you at their doorstep with no passport in hand. What would they care otherwise?
My wife used to work as an air stewardess, and one of her longer flights was a 16 hour non-stop flight from Dubai to Brazil. This involved a 3 day layover, and on the inbound flight she saw some (rather tired) passengers who had been on the outbound flight.
Apparently they were denied entry, however it was too late for them to go back on the same aircraft, so they had to wait in the airport (airside) for the next flight.
This sort of thing tends to confirm my prejudices about those who complain all the time about the IRS as a bogeyman.
It is when you don't respond, straight up don't pay for years, or lie, or something that it gets ugly.
Granted everyone's mileage may vary.
Googling[1] suggests that the IRS has 3 years to audit you and ask for more money in general, and 6 years if the amount of income omitted is >25% the income you reported.
This seems eminently reasonable to me. Just don't lie to them and you don't have to live in fear of making a small mistake.
[1]https://www.thebalance.com/irs-statute-of-limitations-319294...
3 years to audit you
I doubt people with more than $50k in tax debt are the kind of people who can't come up with the money, they're just the people who don't want to.
There's supposed to be a deduction applied to income taxes paid to your host country - up to a cap. There are two intersecting curves related to host-country taxes paid and US income taxes owed minus the exempted part, which I'm not going to describe here, but through key-entry error or whatever bureaucratic things that happen in paper-processing-office, it is not uncommon to get a bill on a year for about that amount. IF their response to your filing in a year (say 2012) gets lost in the mail and IF the same thing happens the following year - you can owe $100K (on paper - even though mistaken), and not even know it.
Having said that the issue was resolved quickly and I'm not sure them just contacting me and waiting for a response would trigger the law in question.
This law could be insanity, or quite reasonable depending on the details.
To their credit, the IRS was fairly reasonable to work with while this was going on. I think the examiner caught on pretty quickly that something didn't make sense.
EDIT: There are about 5M Americans working overseas. At an error rate (of this type) of about 5% (anecdotally, I'd put it certainly above 3% and usually (most years) below 10%), that's still hundreds of thousands of Americans each year who get to have their life thrown into a tailspin. It's not so simple as having the DMV mis-spell your middle-name or shipping your driver's license to the wrong address.
I noted in another comment that I've had my run ins with the IRS before. Provided you respond to them in a timely fashion (they give a lot of time) they consider it is in one phase.
If you don't respond, then it is another phase.
I'm wondering if we're talking about situations where the situation is in a particular phase. Not just the IRS asking, but if you already chose not to respond....
I do know of a several people (4 to be precise, in the last several months) that have (had) non-expired passports denied permission to leave the country (the US) to return home to work, and one person who was no able to renew an expired passport at the embassy of their host country of 20 years (Japan)[fn]. This is all anecdote, and maybe they were in Phase 1+N of your scheme...
[fn] One could argue the wisdom of spending one's entire life/career working in Japan, knowing that they will boot you out as soon as you hit 65 y.o., but that's a different conversation!
I don't have experience in this exact situation, but I asked a friend who she recommended for tax advice not long ago, and it wasn't one of the Big 4.
The State Department can also bypass the rule for emergencies or humanitarian reasons and will do so to allow someone to return to the US, so it is not possible to be stranded outside of the country because of this.
Re: Part II - "Home" for many is not the US. That's just citizenship. Trying to island hop across the South China seas without an "active" passport is problematic. Or if one were to return to the US to bury a parent, getting back to work can be problematic.
I'm not arguing that it can't be worked through. But it is a real time-consuming hassle, esp. when caught unawares because of bureaucratic snafu, that can be career limiting when caught on the wrong side of a dotted line...
[0] https://www.usnews.com/news/politics/articles/2018-07-06/hun...
My understanding is that they won't always even accept a renunciation of citizenship if they believe you're doing it to avoid paying them taxes.
It's no surprise to me that there are significant numbers of expats with large unpaid tax bills, possibly from years of working, paying taxes in the country in which they live but never paying US taxes.
Point being that this is probably not primarily targetting rich people who aren't paying their share, but people who are paying their share in the country in which they live and work, but are failing to pay an extra portion of tax to a country they left years ago.
https://www.irs.gov/individuals/international-taxpayers/fore...
https://www.irs.gov/individuals/international-taxpayers/expa...
:%s/most/a select few you shouldn't work with anyway
> Most Foreign Banks Don't Want U.S. Clients; How To Find One That Does [1]
> U.S. ambassador to Switzerland is asking banks in the country to reverse course and accept Americans as clients. [2]
0: https://www.reuters.com/article/us-banks-expats/u-s-expats-f...
1: https://www.forbes.com/sites/deborahljacobs/2012/07/31/most-...
2: http://money.cnn.com/2016/10/20/investing/swiss-banks-americ...
Think of all the tax forms you've received in the US. W2. All the various 1099s. All the docs related to stocks, SPP, interest on mortgage, real estate transactions, etc. The IRS still needs all that paperwork even if you have these deductions. As you live abroad and conduct these transactions abroad, it becomes entirely your responsibility to fill out these forms properly as they're only going to give you forms relevant to their country's taxes.
This proves burdensome enough that a lot of expats pay thousands a year to tax firms to get all this info and file on their behalf. It's too time consuming and risky to do it yourself. For those lower income folks it's cheaper to renounce than to keep paying these fees.
It's a matter of opinion, but I don't think it's an intolerable burden if your tax prep costs are <10% of your total tax bill.
I think this is where I think we're talking about different things.
It does not only affect people with high earnings. It affects all US citizens working abroad - including those who didn't exactly choose to live abroad.
Again, I'm not talking only about double taxation. I'm talking about the need to file (which is true even if you earn $20K/year in a Latin American or Asian country). In my other comment to you I gave examples of fairly ordinary people in other countries who will be considered as US citizens under current tax laws who are legally bound by the US to do all that paperwork every year. As someone else pointed out, if your income is over $11K/year, you have to file. Run a small store that barely pays the bills? You have to file. Do some stock transactions and gain/lose money? You have to file.
Just think of everything you have to include in your tax form (if you are in the US). Then think of all the tax docs you receive annually. You need to create all those tax docs yourself - including the ones you don't include with your return (in the US, the agency that issued the document already reported that info to the IRS). I got all these docs from various agencies even as a low earner in the US - this is definitely not about high earners.
I find this inconceivable - it sounds absurd, because (a) not all income is reported on those forms anyway, even US based, and (b) fabricating them yourself eliminates their purpose as a means to prevent tax evasion.
What's the IRS going to do, say "well, you tried to file a tax return with 10K euros of income, but we didn't get a W-2, so you're in deep trouble now"? Are they going to add to that 10K or subtract from it?
If you are a US adult who has filed tax returns for a few years, I would expect you to have some experience paying taxes on income that wasn't independently reported. Surely you don't fabricate the documents that are normally sent by the income source, when they aren't present. I just don't believe that is a thing that is done.
I feel like my leg is being pulled here.
Most of what I said is a simple Google search away. This will be my last comment:
>I find this inconceivable - it sounds absurd,
This is a fairly poor metric for evaluating the veracity of anything.
>because (a) not all income is reported on those forms anyway, even US based
In my experience, most forms of income in the US have been categorized. If you made money, there very likely is some appropriate form you should fill out. How much information the IRS needs about it varies amongst income types. As an example, I sold stuff online for a short while - did not make much money, but the volume was large (probably in the hundreds of items in one year). When I looked into what I needed to report for tax purposes, I was hoping it would be a simple case of 1. Costs of goods 2. Revenue made, and tax on the net. Nope: I found it fairly burdensome. Had I paid a tax person to do it, I would have spent more on the tax professional than my net profit (which really was very low).
>If you are a US adult who has filed tax returns for a few years, I would expect you to have some experience paying taxes on income that wasn't independently reported. Surely you don't fabricate the documents that are normally sent by the income source, when they aren't present.
No one said anything about "fabricating". If the agency doesn't provide you one, you provide that information to the IRS in some way or other. Sometimes it will literally be filling out the same form. In other cases, the IRS will have a schedule for you to fill out. Perhaps the W-2 was a bad example.
I know someone who sold a property he owned outside of the US. The income generated from the sale had to be reported and capital gains tax had to be paid. Now in the US when you do this, some party (I believe the seller's agent) gives you a simple form which you should attach to your tax return. Since this was a foreign transaction, the other party gave no such form. He considered just reporting it as an investment without that 1099. He consulted some tax folks, and they told him that he should do that, but while the IRS may look the other way, legally he is obligated to fill out the form and attach it. The problem was he did not have access to all the figures needed to fill out the form. They advised him to fill out what he could and likely the IRS will accept his explanation.
I personally have had to deal with the IRS - as others have commented, while it always does seem to work out, they can be very annoying. In my case, I was claiming education credits. Some years after I left school, they wanted proof. It took several back and forths to get them off my back, and the experience was quite negative. They continually said "Yes, if you give us such and such information, it will suffice," and when I gave them said information, they kept saying "Not enough - we want more proof". Had to reach out to the university for help, and they were quite surprised - they said they never had to give out as much information as I was asking for students to get those credits, and I was lucky they still had the extra information that I was requesting.
So yes, perhaps usually the IRS will accept the explanation for missing information in forms you can't get because you don't live in the US. But it's not a guarantee.
And I do. For most of the world, tax prep costs are negligible. I'm not sure how many countries have tax prep for individuals as a big business like it is in the US.
I think we're talking about very different things. To directly address your comment: When you say the market is a small number, you are correct: The market is workers living outside the US who happen to be American. Foreign workers of pretty much every other country do not deal with this. It's a market very targeted to Americans.
And its smallness makes it expensive.
But when I said how your comment about paying for tax prep was a very American outlook, I was referring to the reality that so many in the US rely either on tax software or pay a company to do their taxes. This is a practice alien (AFAIK) to most countries - they have much simpler tax codes and rarely do they need to make special payments for tax prep. Having to pay a tax prep company because you happen to be American is effectively a tax on being an American. For many outside the US, saying "It's not a big deal - just pay a tax company to handle it" is like me telling a typical American "It's not a big deal. Just pay a company $500 annually to do the paperwork that gives you the right to own a pet" - it's a crazy notion. It's easy to dismiss it as "Less than 10% of your tax burden - what's the big deal?"
Just a few days ago I was reading a story of a Canadian/American dual citizen. She was born to American parents, but as a kid her parents migrated to Canada - she had lived most of her life in Canada, and had no real relations in the US. The old tax law was that she is not considered a US citizen unless she actively declares herself as one after she turns 18. That law changed recently (I think under Obama) to treat her like all other Americans for tax purposes. Suddenly she had to deal with filing paperwork, and getting taxed on certain retirement/investment benefits (that are tax free in Canada but not in the US - think stuff like Roth IRA in the US), etc.
When I was in school, I knew many foreign grad students - it can take 5-8 years to get a PhD - and if you're young and married, there's a good chance you'll have a kid or two during your stay at school. Some of them returned to their home countries (contractual obligations, etc). I don't know if their kids will eventually move to the US and claim citizenship, but they will have the burden of dealing with US taxes wherever they live in the world - whether they earn a good amount of money or not.
Finally, getting back to your original comment:
My heuristic is that a percentage of a percentage is quite small, in general. It's fundamentally different from $500, which could be a lot of money or not depending on context. Percentages scale.
That's true above the $10k limit, yes.
> For those lower income folks it's cheaper to renounce than to keep paying these fees.
I guess it's a good thing that's easy for them, then!
I fail to see how you drew that conclusion - it was not what I said.
If you consider paying $2K to avoid doing paperwork that gains you very little "easy", I would like to be your friend.
Your statement has within it an assumption that it is not a hardship for low income earners.
I would like to congratulate you. For a while now I've wondered at the value of engaging in online debate, and you've finally convinced me to apply this rule:
"Don't engage much with someone who can be enlightened with 30-60 minutes of searching the Internet, unless there is an audience."
Summary: Life is too short.
You have come off as quite sure of your stance, and I do not get any signal from you that you'd like to be informed otherwise. The submission is old enough that I do not think there is any audience left. I do not see any merit in engaging further.
That lack of understanding dovetails nicely with your apparent goal of educating others about their mistakes.
When I pay taxes to a foreign country, I generally get a tax credit on my US taxes. Complaints like yours tend to lead me to infer you think you're entitled to lower than US tax rates in some tax shelter locale, but you are implying (for sympathy) the issue is being taxed higher than a typical citizen of the EU or US.
This is yet another reason Americans would benefit from international human rights.
45% of tax filers owe no income tax. That's not the same as owing nothing. Independent contractors don't have FICA deducted from their paychecks, and with the rise of gig jobs, there are quite a lot of "poor" people who owe 15% of their income at the end of the year.
PS: “Literally” is an unnecessary word.