But wait there's more. While President Trump's Executive Order temporarily banning certain foreign nationals from entry into the United States is dominating the headlines these days, employers now have something else to worry about. Under a 2015 law, Section 7345 of the Internal Revenue Code, the State Department has the right to revoke a US citizen's passport for nonpayment of delinquent Federal taxes. The Internal Revenue Service recently posted guidance on its website to provide an understanding of how the law may apply in practice. In general, if the IRS assesses a taxpayer for unpaid federal US taxes, and the taxpayer does not take steps to address the problem, the State Department may revoke, deny or limit that person's passport. Just imagine the administrative headache and threat to the business if the employee is on assignment to a foreign country when the revocation occurs, or travels frequently to other countries on business, or is planning to take an overseas posting in the near future. Employers beware!
Seriously Delinquent Tax Debt
An individual's unpaid Federal taxes puts the individual's US passport at risk if he or she has a "seriously delinquent tax debt." In that case, the IRS will certify that fact to the Treasury Secretary, who will in turn notify the US State Department for action to deny, revoke, or limit that person's passport. Note that US passports are issued only to US citizens, not to green card holders, so US citizens are the ones at risk here (still a sizeable percentage of the workforce). According to the IRS guidance recently issued, the IRS has not begun certifying tax debt to the State Department, but employers should nevertheless prepare themselves for this possibility in the near future.
So, what is a "seriously delinquent tax debt"? It means an unpaid, legally enforceable Federal tax liability of an individual: (A) formally assessed by the IRS; (B) greater than $50,000 (to be adjusted for inflation starting in 2017 and which includes interest and penalties); and (C) with respect to which -
(i) the IRS has filed a notice of lien, and the person's administrative rights have been exhausted or lapsed, or
(ii) the IRS has issued a levy.
Accordingly, revocation of a passport won't happen just because a person has unpaid Federal taxes. The IRS must go through a number of formal steps to assess the liability and seek payment, including providing notification to the individual along the way, before the Federal tax liability matures into a "seriously delinquent tax debt". In addition, the IRS must notify the individual in writing when it certifies to the State Department that there is a seriously delinquent tax debt. So, an employee who has not paid attention to the IRS notices of deficiency, or is trying to ignore the Federal tax debt, or hopes the IRS will just go away, is the one who will lose the US-passport under the new law.
Note the $50,000 threshold is a little misleading. Since this threshold includes interest and penalties, which under law can add up to some significant amounts, it is possible that a person can have a seriously delinquent tax debt even where the liability itself is smaller than $50,000.
Exceptions and Ways to Mitigate
As harsh as this law might seem, there are some exceptions and some ways to mitigate the risk of penalty. For example, if the taxpayer is paying the liability in a timely manner under an installment agreement with the IRS, or under an offer of compromise accepted by the IRS or a settlement agreement with the Justice Department, the liability is not subject to this law. There are also exemptions if the taxpayer requests a collection due process hearing, or where the IRS has suspended collection because of a request for innocent spouse relief.
Before denying a passport application, the State Department will, following receipt of certification, hold the application for 90 days to allow the individual to make full payment of the tax debt or make alternative arrangements with the IRS. There is no similar grace period for revocation of an existing passport, however. Notwithstanding, if a taxpayer already has his/her US passport and the State Department decides to initiate the revocation process, the Secretary of State, before making the revocation, may limit a previously issued passport only for return travel to the United States or issue a limited passport that only permits return travel to the United States. In that way, US citizens who are abroad when their passport is certified for revocation can at least return back home. If an individual is caught by surprise by the action to deny or revoke his or her US passport, there are several remedies available, including paying the full amount of the tax debt, making alternative payment arrangements such as installment agreement or an offer in comprise to the IRS, and still keep the passport.
If the individual has recently filed his or her tax return for the current year and expects a refund, the IRS will apply the refund to the debt and if the refund is sufficient to satisfy the seriously delinquent tax debt, the account will be considered paid. Note that it is not sufficient merely to pay down the tax debt so that it is under the $50,000 threshold.
What Employers Should Do - Action Steps
Employers will want to be proactive to avoid the adverse impact on their business that can occur when the State Department denies or revokes an employee's US passport. Since failure to withhold US federal income taxes on a timely basis and in the correct amount may lead to the assessment of unpaid taxes against the employee, the employer will want to avoid the employee relations nightmare and potential litigation that might result if the employee's passport is revoked or denied because of the employer's actions or inactions. Also note there are also potential discrimination risks that a US employer might trigger depending on how it reacts to the employee's situation. For example, employees who have a Federal tax debt may very well also have filed for bankruptcy or had their wages garnished. Under Federal bankruptcy law, a US employer may not discriminate against applicants or employees who have filed for bankruptcy protection. A US employer also may not discriminate against an individual associated with such a person, such as where the employee's spouse has a tax debt. Federal and state laws similarly prohibit US employers from discharging an employee who is subject to an order for garnishment of wages. With respect to inquiries related to financial status or tax liens in particular, the EEOC recommends "limiting the scope of the inquiry and adopting explicit, objective guidelines for using the requested information in a manner that is likely to be consistent with the business necessity standard." To avoid risks of employment claims, US employers should be cautious of making inquiries into an employee’s financial status for the purpose of employment decisions about hiring or work assignments. We recommend that employers take the following five action steps now to avoid a problem in the future:
1. Publicize to all employees this law and the recent IRS guidance. Communicate to everyone the seriousness of the law's application and the potential harm it can cause not only to them but to the business itself.
2. Since employees in some states will use their passport as identification to get through TSA lines in airports, especially if they live in states where a state-issued driver's license has been determined by TSA to be an unacceptable form of ID, communicate as well to employees who engage in domestic business travel.
3. Carefully craft notices to applicants and employees and carefully manage information requested or gathered to comply with employment anti-discrimination provisions. Include as part of the onboarding process for new hires who will be posted on international assignment, or expected to travel on business both inside and outside of the United States, a notice of the potential consequences of having an unpaid Federal tax debt. It would also be prudent to mention to assignees that these rules would also apply to their spouses, as many assignees travel with their family members. Similarly, employers should add to their global mobility policy a provision that addresses the risks posed to both the employee and the employer of impediments to the ability to travel for any reason, and should recommend that all potential international assignees and other mobile employees educate themselves about any risks of business travel that is personal to them or their situation, and encourage employees or applicants to contact company human resources if they have related concerns about business travel. Where the ability to travel is a qualification for the particular position, a US employer may ask an applicant or employee to certify to the employer as a condition of employment or prior to the start of their business travel or international assignment that they have no known travel restrictions.
4. Work with managers on how they can support their mobile employees, without risking potential employment claims. This support may involve some “do’s and don’ts” training on how to respond if an employee is unable to travel for reasons that can also implicate the protections of the non-discrimination rules.
5. Consider the type of resources the company may want to offer to mobile employees to assist them in the event they incur unpaid Federal tax debt that could potentially lead to denial of a passport application or revocation of their passport under this law.
The View for Global Employers
For non-US employers who have employees with US passports, similar notices should be provided regarding the possible travel restrictions associated with an unpaid US Federal tax debt. Non-US employers should proactively assess the US Federal tax obligations of income to US citizens working for them, and any impact on the assignees' US Federal tax liabilities prior to their going on assignment. Analogous anti-discrimination principles, and privacy protections, may apply under the applicable local and home country laws. Accordingly, non-US multinational companies should navigate these issues in a similar, careful way with respect to their mobile workforces.