An Internal Revenue Service (the “IRS”) representative, Paul Mamo, confirmed at the New York University Tax Controversy Forum that the IRS is finalizing “Letter 6152,” which will be sent to US taxpayers with seriously delinquent tax debts to warn them that their passports will be revoked if their debt is not settled.

Background

Since 2015 the IRS has been required to notify the United States State Department if a taxpayer has been certified as having a seriously delinquent tax debt. t the same time, the IRS must notify the affected taxpayer in writing of the certified debt submitted to the State Department for action, which will include a summary of available civil remedies. Upon receipt of such notification, the State Department will generally deny a pending passport application for issuance or renewal, or revoke, or limit, a previously issued US passport.

A seriously delinquent tax debt is an unpaid, legally enforceable federal tax liability in excess of $52,000 in 2019 (the threshold is adjusted annually for inflation), including interest and penalties, for which:

  • A notice of federal tax lien has been filed and the taxpayer’s administrative remedies have lapsed or have been exhausted; or
  • A levy to collect the debt has been issued.  

Debt that is timely paid pursuant to an approved installment agreement, offer in compromise, or settlement agreement with the IRS, or for which collection has been suspended, is not a “seriously delinquent tax debt” for purposes of the passport revocation rules. Furthermore, the State Department can issue a passport to seriously delinquent taxpayers in emergency or humanitarian situations.

The IRS began notifying the State Department of taxpayers that have been certified as seriously delinquent in February 2018 (via “CP508C Notices”). Since that time, approximately 110,000 of the 400,000 certified taxpayers have resolved their tax debts, and in turn, have been decertified by the IRS after resolving his or her tax issues.

Letter 6152

The IRS is expected to contact seriously delinquent taxpayers in the near future via Letter 6125 to caution them that their passports will be revoked unless swift action is taken. Upon receipt of Letter 6152, taxpayers should promptly resolve their tax debts by payment in full, entering into an alternative payment arrangement with the IRS, or establishing that the certification was erroneous. The IRS will reverse the certification within thirty (30) days of the date the tax debt is settled and will notify the State Department as soon as practicable.  

Loss of Passport, Not Citizenship

The loss of a passport under these rules does not revoke the affected individual’s US citizenship. An individual may, however, separately renounce his or her citizenship and will be treated as doing so upon the first to occur of:  

  • The date that the individual renounces his or her nationality before a diplomatic or consular officer of the United States;
  • The date that the individual submits to the State Department a statement of voluntary relinquishment;
  • The date the State Department issues a certificate of loss of nationality; or
  • The date a US court cancels a naturalized citizen’s certification of naturalization.  

The loss of US citizenship (i.e., expatriation) may trigger unintended tax consequences if an individual would be treated as a “covered expatriate”. An individual who has expatriated (i.e., lost his or her US nationality or abandoned his or her lawful permanent residence) will be a covered expatriate if he or she meets one of the three following tests:

  • The tax liability test. The individual’s annual net income tax for the preceding five (5) years is more than $168,000 in 2019 (this amount is adjusted annually for inflation);
  • The net worth test. The individual’s net worth is $2 million or more; or
  • The certification test. The individual fails to certify that he or she has complied with all US federal tax obligations for the preceding five (5) years.

If a taxpayer falls into one of the categories above, the taxpayer may be subject to a mark-to-market “exit” tax whereby all of the taxpayer’s property is deemed to have been sold for its fair market value the day before expatriation. There is an exception to the first two tests noted above for certain dual citizens. A taxpayer’s deemed net gain from the exit tax will be reduced (not below zero) by an exemption amount equal to $711,000 in 2019 (the exemption is adjusted annually for inflation). A taxpayer may elect to defer payment of tax as a result of the deemed sale, subject to various conditions.

Considerations for US Passport Holders

While the loss of a US passport does not revoke US citizenship, it will significantly restrict an affected individual’s ability to travel. This has the potential to create hardships in both an employment and leisure context. US citizens resident in the United States will find themselves unable to leave the country, even if they are dual citizens, because US citizens are required to enter and exit the United States on their US passports. Similarly, US citizens living abroad will find themselves unable to return to the United States, and they may encounter significant obstacles abroad. In certain circumstances, if a taxpayer’s passport is revoked and he or she is outside of the United States, the State Department may issue a limited passport that is only valid for direct return to the United States.

If a taxpayer receives Letter 6152, they should contact a US tax advisor and attempt to promptly settle their tax issues with the IRS to avoid advancement in the passport revocation process.