Do Something About Your IRS Debts Now Or Lose Your Passport
The IRS issued a reminder to taxpayers who owe significant tax debts to the IRS: deal with it now, or lose your passport!
According to Fox Business. When the FAST Act became law on December the 4th, 2015, the State Department was authorized to cancel the passports of delinquent taxpayers once the IRS notified them that a seriously delinquent IRS debt was outstanding.
The act defines a seriously delinquent tax debt as “an unpaid, legally enforceable federal tax liability greater than $50,000, including interest and penalties.” The limit is adjusted annually, so for 2019, the amount is $52,000.
Only a few exceptions to the new law exist:
- IRS tax debts which are being paid back on an installment agreement and which is compliant.
- IRS tax debts which are being paid back in terms of an Offer In Compromise and which is compliant, Check our blog post “How to apply for an installment agreement”.
- IRS debts for which your tax consultant or certified public accountant timely requested a Collection Due Process Hearing in respect of a levy or liability where the collection has been suspended due to an innocent spouse claim.
Except for the above exceptions, the law instructs the IRS to report taxpayers who meet the threshold. The law does, however, require the IRS to notify you in writing, by sending you a Notice CP508C which will inform you what you need to do to resolve your debt when they certify your liability to the State Department.
Also, the IRS will send you a Letter 6152 [Notice of intent to Request U.S. Department of State Revoke Your Passport] to provide you with an opportunity to resolve your debt. You are required to contact the IRS within 30 days after receiving the same. As a rule of thumb, the IRS will not revoke someone’s passport if they are making a bona fide attempt to resolve their IRS tax debts.
The State Department will hold your passport application or renewal back for 90 days as soon as it receives notification from the IRS. This is to grant you the opportunity to resolve errors, make full payment, or come to a satisfactory payment plan. There is no grace period. The State Department will revoke your passport upon notification.
The IRS could request the State Department to revoke your passport also if they (IRS) reversed your certification on the grounds of promised payments which you failed to make. Also, if the IRS is aware that you could have used offshore assets to pay your IRS debt, and that you elected not to, the State Department can be requested to revoke your passport.
If you are on the list and have travel plans, it is strongly advised that you or your tax attorney contact the IRS immediately. If you qualify for expedited treatment, the revocation can be reversed within 14 – 21 days.
For this, you will need to show the IRS that you live abroad and plan to travel within the next 45 days. Documentation will be required to verify the same:
- Proof of travel [Plane Tickets; Hotel Reservations]
- Copy of State Department Letter revoking your passport or denying your passport application.
To be removed from the list, you have to proof:
- That the debt is fully paid
- That the obligation is not legally enforceable
- That the debt is not a seriously delinquent tax debt in law.
It will not help you to pay the debt down under the $52,000 threshold. Once you hit the limit, you have to pay down the full amount before you can be removed from the list.
The penalty is a burden special to business owners whose business are in delinquency with the IRS. Fortunately, the IRS has softened its requirements for businesses who want to apply for an offer in compromise (OIC) to settle their debts with the IRS. Check our blog post “How to Qualify for an Offer in Compromise with the IRS”.
One of the typical dilemmas for a business when things go South is to choose to pay taxes or business expenses, hoping that when things get better they will pay taxes and get up-to date. This happens to one of the cases who came to us for consultation. The business owner was expecting a payment for a contract and he decided to pay business expenses and payroll over taxes. He did not get the payment and had to litigate the case. In the meantime, the taxes accrued interest and penalties. He finally won the case, but the IRS put a lien on his credit and now all the money he received will go to satisfy the IRS debt first. He is out of business. Keep in mind that tax business debts coming from payroll are not dischargeable in bankruptcy.
This could have been prevented by filing an OIC. The OIC allows the business to offer an amount lower than the tax owed, under strict criteria and after the IRS determines that it is the best alternative to both collect the taxes and keep the business in operation.
The new requirement to file an OIC starts with compliance with at least one quarter (down from two quarters) of continuous payments and compliance with all its current tax obligations when the OIC is filed and the responsible party or parties should have been identified for the assessment of something called Trust Fund Recovery Penalty (TFRP) or the party or parties who are liable for the unpaid business taxes at their personal level. This should continue while the OIC is pending approval.
Regardless of the economic condition of the business and even if the OIC cleared the business tax debt coming from income tax, payroll taxes will not be forgiven and the TFRP will be assessed at a minimum for payroll taxes owed plus interest and penalties. The amount owed will be paid jointly by all responsible parties at their personal level. If one of the parties fail to pay the other or others will be responsible for that unpaid share.
To apply for an OIC the IRS requires that either payroll taxes owed are paid or assessed against the responsible parties. The average of payroll tax owed related to the total debt is roughly 60%. This means that the maximum amount of debt forgiveness for a business thru an OIC is 40%. Still a good deal.
If you are a business owner and believe that your business can grow again if the tax debt issue is solved, give us a call to help you file an OIC and thrive again.
Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.
If you have any questions in relation to your IRS debts, send them to us.
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