Legislation quietly passed last year in Congress may prevent you from traveling abroad if you owe a significant amount of tax debt. The law, initially proposed in 2012, did not gain overwhelming support from Congress and the President until 2015. The enactment, part of H.R.22, adds "Revocation or Denial of Passports In Case of Certain Tax Delinquencies" (Section 7345) to the tax code. It grants the State Department the power to revoke, limit, or deny a passport to anyone with a considerably delinquent tax debt exceeding $50,000. That amount includes penalties and interest, which add up quickly. The IRS compiles the list of offenders and gives the State Department the green light to cancel or deny passports.
While this law looks like an attempt to crack down on offshore accounts, criminal tax cases, or "flight risks" who may try to escape from tax debt, it's merely intended to impose sanctions to improve tax collections. The legislation applies to those living in the US and overseas.
Two other pieces of legislation have already been implemented to facilitate tax collections. People with delinquent tax debt can be subject to a Federal Tax Lien, whereby the government gains legal rights to their property. Additionally, the Foreign Account Tax Compliance Act requires foreign financial institutions to report foreign assets held by American account-holders.
Many are questioning the IRS's role in restricting passports and are opposed to having two agencies involved in enforcing tax collections.
Fortunately, if you owe the IRS and are especially determined to follow through with your travel plans, certain circumstances may exempt you from the restriction. The State Department can issue passports in emergencies or for humanitarian reasons. If you are promptly paying your delinquent taxes in installments, you'll still be allowed to travel. If you are disputing your tax bill in court, it isn't yet considered "tax debt," so your plans shouldn't be thwarted.
Understanding the Fine Print
The particulars of the regulation haven't been completely hammered out, leaving room for confusion. It's not yet known, for example, how long those eligible for special dispensation will have to wait for approval. The legislation's lack of clarity, and the tactics people can use to get around it, may undermine its efficacy. The law definitely has some unintended consequences, as it likely creates an incentive for people to contest their IRS bills so that they won't be considered tax debt.