If you are seriously behind on paying your taxes, here’s one more reason not to simply keep letting your tax bill slide (and fines and fees accumulate): The Internal Revenue Service (IRS) has begun to implement new procedures which may cause individuals with “seriously delinquent tax debts” to have their passport applications or renewals denied—or even to have their passports revoked.
These procedures may be newly enacted, but this initiative is actually an implementation of the Fixing America’s Surface Transportation (FAST) Act, which was signed into law in December of 2015. The FAST Act requires the IRS to notify the State Department of taxpayers the IRS has certified as owing a seriously delinquent tax debt. Under this law, the threshold for action is equal to $51,000 or more in back taxes, penalties, and interest for which the IRS has filed a Notice of Federal Tax Lien and the period to challenge it has expired or the IRS has issued a levy.
Five ways to avoid having your passport privileges infringed upon
While these new procedures may sound harsh, especially if your freelance business depends on international travel, there are ways to avoid having your passport privileges infringed upon, including:
- Paying the tax debt in full. If you can swing it financially, this is the best option. There is no point in prolonging the agony of being in tax purgatory if you have the funds available to pay your tax bill, so just do it!
- Setting up an approved installment agreement to pay your tax bill. You can request a payment agreement with the IRS by filing Form 9465 and mailing it with a tax return, bill or notice. You may also be able to use the IRS online payment portal to set up a monthly payment agreement for up to 72 months.
- Requesting an offer in compromise to lower your tax obligation. If you are a financially distressed taxpayer (in the opinion of the IRS) you may qualify for an offer in compromise, which is an agreement between you and the IRS that settles your tax liabilities for less than the full amount owed. The IRS will look at your income and assets to determine your ability to pay.
- Negotiating a settlement agreement with the Department of Justice. While this sounds like fun (not), this is an option which may require outside expertise. Seeking the advice of a tax professional can help you navigate this option.
- Request a collection due process appeal with a levy, or try to have the collection of your tax debt suspended using an innocent spouse election or an innocent spouse relief. Again, this is likely an option that you will need professional help to work out with the IRS.
Really down on your luck? The IRS may let you keep your passport after all.
The IRS will extend some grace to taxpayers facing particularly tough circumstances. For example, your passport won’t be at risk under these new procedures if the following applies:
- You are in bankruptcy.
- You are identified by the IRS as a victim of tax-related identity theft.
- Your account has been determined by the IRS to be currently uncollectible due to hardship.
- You are located within a federally declared disaster area.
- You have a request pending with the IRS for an installment agreement.
- You have a pending offer in compromise with the IRS
- The IRS has accepted an adjustment to your tax bill that will satisfy the debt in full.
Another important exception to these new IRS procedures is being made for any taxpayer serving in a combat zone. In this case, the IRS will postpone notifying the State Department about their tax situation and their passport is not subject to denial during this time.
If you need your passport, be prepared to pay the piper.
Assuming that you don’t qualify for any of the soft-touch IRS scenarios above and you don’t want to risk losing your passport, you will need to come up with a way to pay your tax bill. Of course, this is in your best interest in the long run anyway, because aside from losing your passport privileges, the longer you have an outstanding and significant tax obligation, the more it will cost you financially given these other penalties you may have to pay:
Failure to Pay penalty. According to irs.gov: “If you do not pay your taxes by the tax deadline, you normally will face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes. That penalty applies for each month or part of a month after the due date and starts accruing the day after the tax-filing due date.” Ouch. It is always better to pay something toward your tax bill (and reduce the compounding factor of this penalty) than pay nothing at all.
Failure to File Penalty. If you have a significant tax bill, chances are you may have a few tax returns that you have not filed. The IRS gets you on this point, too. The failure-to-file penalty is 5% per month or partial month, up to a maximum of 25% of what is owed. If you file later than 60 days after the tax deadline, the minimum penalty rises to the smaller of $135 or 100% of the unpaid tax. This penalty is on top of any other interest charges or late-payment penalties that you are assessed.
Forfeiting the value of any tax refund. If the IRS owes you a refund and you have any unpaid taxes, you will not receive the full refund. If your tax obligation is greater than the refund you will not receive anything until you rectify your tax debt. Otherwise, you will receive your refund, less the amount that you owe.
Take action today to keep your passport!
With the IRS taking more aggressive action, delinquent taxpayers with large tax bills should take notice and make a plan to eliminate their tax debt. Even if you owe less than the $51,000 threshold and have outstanding tax bills, consider enlisting help from a tax professional to find options for working with the IRS to resolve your tax obligations. Taking action now can preserve your passport privileges—and your financial future.
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free consultation to members of Freelancer’s Union and a monthly email newsletter covering tax, accounting and business issues to freelancers on his website, www.cpaforfreelancers.com which also features a new blog, how-to articles, and a comprehensive freelance tax guide.
Jonathan is happy to provide an initial consultation to freelancers. To qualify for a free consultation you must be a member of the Freelancers Union and mention this article upon contacting him. Please note that this offer is not available Jan. 1 through April 18 and covers a general conversation about tax responsibilities of a freelancer and potential deductions. These meetings do not include review of self-prepared documents, review of self-prepared tax returns, or the review of the work of other preparers. The free meeting does not include the preparation or review of quantitative calculations of any sort. He is happy to provide such services but would need to charge an hourly rate for his time.