NEW YORK: US tax authorities have introduced a new US law starting January1, 2016, authorising the State Department to deny, revoke or limit the use of US passport to serious tax offenders any time, even while traveling outside the country.
A serious tax debt is defined in the law as anyone who owes more than $50,000 to the US government. The new law applies to Americans living and working abroad as well. The passage of the law has serious consequences for Americans in general but particularly for millions of immigrants who frequently travel abroad to visit their country of origin. This group includes a large number of expatPakistanis who hold a US passport as well as their Pakistani passport as both countries allow dual citizenship.
Despite keeping more than one passports, a majority of such Pakistanis prefer to travel on their US passport as besides being a legal requirement, it allows them visa-free entry or visa-on-arrival option into over 170 destinations across the globe.
However, passage of this law means that such expat Pakistanis proceeding on a family visit to Pakistan or an important business meeting abroad can be stopped by the border control for holding an invalid US passport due to delinquent taxes.
Similarly, green card holders on the path of obtaining US citizenship and subsequently US passport are also at risk if they ignore the tax notices issued by the IRS.
Estimates suggest that there are over eight million Americans living abroad. These are perhaps the most vulnerable group affected by the new law as they rely on their US passports far more heavily than their domestically based compatriots.
Although, many of them hold dual citizenship and therefore also keep a passport of their original country, they prefer to travel on their US passport as it is much easier to obtain travel privileges with a US passport than travel documents of their country of origin.
According to the visa restrictions index, the US passport was ranked second in the world in terms of travel freedom available to its citizens. It is therefore not surprising that there has been a phenomenal rise in the number of valid US passports in recent years from roughly 30 million in 1995 to 126 million in 2015.
The restrictions and tedious procedural details on visa issuance in countries facing political disturbances has also contributed to this surge in US passport issuance.
Lately, many states within the US are also considering replacing the driving license with a US passport as acceptable travel document for domestic travel. In addition, the passport is a primary photo identity document accepted by many domestic and international agencies for identity verification purposes. Hence, the importance of a US passport cannot be over emphasised.
However, the newly introduced law has put the passports of many US citizens at risk who had ignored their tax obligations for years. The message is clear from the US tax authorities for this group of people: “The US is serious in collecting taxes and defaulters with traveling requirements are on the frontline.”
Seeking tax compliance through travel documents as an enforcement toolwas on the cards for quite some time. Even before the passage of the new law, many legal immigrants to the US were facing frequent questioning by the border control about their US tax returns status.
Many green card holders living abroad for bona fide reasons assume that since they do not earn any income, maintain assets and own business in the US, they are not required to file US tax and information returns.
This misunderstanding often results in losing their green card when the border control officers question about their prolong stay abroad and whether or not they filed their US tax returns. Under the current US tax regime, citizens and green card holders in some cases are required to file informational tax returns even though they might not be earning any income in the US.
However, because of lack of awareness such filing is ignored for years and the awareness comes only with a heavy toll often in the form of losing or restrictive use of their green cards. With the rising budget deficit, countering tax evasion has become a major policy initiative in the US in recent years. It is estimated that there are about 12.4 million delinquent American taxpayers worldwide owing nearly $131 billion in assessed taxes, interest and penalties in 2014.
Out of these total delinquencies, approximately 15,000 US citizens and green card holders are estimated to be residing or maintaining financial and non-financial assets in Pakistan.
IRS sent over 855,000 notices to US persons abroad in 2014, but many notices failed to reach the intended party due to difficulty with international addresses. The new law is therefore part of a series of actions initiated by the US tax authorities to ensure tax compliance by its constituents, especially those who maintain their residence and hold assets outside of the country.
In the year 2010, the US Congress passed the Foreign Account Tax Compliance Act (FATCA) which enabled the US to access financial data of its citizens and green card holders who maintain bank accounts and other financial assets in foreign countries.
This was in addition to the longstanding FBAR requirements which mandate all US citizens and green card holders to report details of their bank accounts in foreign banks on their annual income tax return. It is important to note that US tax law stipulates its citizens and green card holders, whether they are resident in the US or not, to report their worldwide income by filing the annual income tax return and pay taxes in the United States.
Given the changes in regulatory framework and its vigorous enforcement by US authorities with the cooperation of foreign tax authorities, it is abundantly clear that US citizens and green card holders who have not been tax compliant will face serious difficulties in their travel within and outside of the US.
This is likely because of the low trigger amount of $50,000 or more in delinquent tax debt which can easily be crossed since penalties and interest can add up very quickly.
Under the US tax law, there are a number of penalties on tax non-compliance such as penalty on non-filing, non-reporting, under-reporting, delinquent taxes, not filing or not paying on time penalty, etc. These statutory penalties can go up to seventy-five percent of the tax amount and easily cross the $50,000 threshold in a quick span of time.
Tax penalties for Americans and green card holders living abroad are typically higher as foreign asset information reporting applies more often to US individuals holding foreign financial assets such as interests in foreign entities or foreign financial accounts. It is also important to note that not having any income does not implicitly mean that there will not be any penalties imposed as some citizens and green card holders are required to file informational returns failing which they expose themselves to imposition of penalties.
This is particularly true for citizens and green card holders who permanently reside in other countries and are not much interested in becoming compliant with their US tax obligations. Whereas for some expats, the non compliance is not deliberate as they are not aware of the complicated tax regulations and do not receive the IRS notices because of inefficiencies in international mail delivery system.
Contrary to general perception, technology based solutions such as emails, text messages etc. are still not an available option while corresponding with the IRS.
The new law is part of a broader US strategy to ensure tax compliance by offering stricter regulations as well as generous incentives to resolve the outstanding tax issues. For instance, one key element of the new passport revocation law is that its provisions do not apply to citizens who have already approached the IRS and are in the process of resolving their outstanding tax matters. Similarly, IRS is encouraging citizens and green card holders to become compliant and avoid heavy penalties through its various amnesty programs such as the Offshore Voluntary Disclosure Program (OVDP).
At the beginning of 2012, IRS reopened this program with no set deadline and offer protection from legal proceedings if the delinquent citizen or green card holder becomes compliant. Another option is the Streamlined Procedures initiated in 2012 which were significantly expanded in 2014.
Lately, the deadline for FATCA reporting has been extended by the IRS for banks allowing more time to citizens and green card holders to take advantage of the amnesty schemes and straighten their outstanding US income tax matters by either correcting their previously filed incomplete or incorrect informational and income tax returns or addressing non-filing by submitting the required information to the IRS.
Since the inception of the above incentives,tens of thousands of US persons around the world and several in Pakistan have come forward voluntarily to disclose their foreign financial assets, taking advantage of special opportunities to comply with the US tax system and resolve their tax obligations. Estimates suggest that US tax agency has collected over eight billion dollars from US persons taking advantage of the amnesty schemes. It is therefore high time for US persons in Pakistan to avail the window of opportunity and save themselves from strict penalties, including loss of privilege to travel on their US passport.
The writers are New York & Dubai based US tax advisers