The IRS Can Take Your Passport
It’s official. The IRS can now revoke your passport if you owe them US$50,000 or more.
The new law was tucked away in a new highway bill dubbed the FAST Act (Fixing America’s Surface Transportation Act) that was signed by President Obama last week. What better way to get a contentious, potentially civil rights-violating bill passed than by wrapping it up inside a much bigger bill (the FAST Act is 1,300 pages) with a completely unrelated and far more positive agenda, thereby almost guaranteeing that no senator or congressman is actually going to read it.
In fact, this law was put forth before, in 2012, by the General Accounting Office. However, that time it was put out more openly. People became aware of what was being proposed, and the bill was shut down.
It’s worth remembering that this is how the U.S. government saddled the world with FATCA… by slipping it into legislation meant to create jobs.
If you’re an American who doesn’t travel internationally, maybe you’re thinking, initially, well, what’s the big deal? I pay my taxes, and I don’t really need a passport anyway…
You might also be thinking that US$50,000 is a lot of taxes to owe the IRS, so how far-reaching a situation could this be?
Unfortunately, what we’re talking about is way farther-reaching than may be immediately apparent. It’s not only taxes owed but also penalties and interest that are considered toward the US$50,000 threshold. In our current age, it’s not that uncommon or difficult to find yourself owing the IRS fines of more than US$50,000, perhaps, for example, for not filing forms you didn’t know you needed to file. The minimum fine for not filing your FBAR is US$10,000. However, if the IRS decides that you willfully failed to file your FBAR, the penalty jumps to US$100,000 or 50% of the account values, whichever is greater.
Inherit an offshore bank account from your great aunt in Italy that contains US$10,000 and fail to report that account. Boom! The IRS can fine you US$100,000… and now they can cancel your passport, too.
IRS Outside The Country
If you’re outside the country when the IRS revokes your passport, you’re screwed. You could be stuck in the country where you last landed. Or, maybe, as a colleague suggests, the IRS could wait until you’re mid-air on an international flight to revoke your passport. You land without a valid passport. Local immigration ushers you to a lounge where you wait in limbo until the airline can arrange to ship you back to the United States.
Note that the complications and restrictions associated with this new law are not limited to international travel. Another new piece of legislation, the Real ID Act, takes effect on Jan. 1, 2016, along with the new law giving the IRS power over your passport.
The Real ID Act requires states to adhere to a minimum standard for state-issued IDs, as set out in the law. Residents from states that don’t meet the standard will no longer be able to use a driver’s license as valid ID to get through airport security. Four states currently don’t meet the requirements. These are Louisiana, New York, New Hampshire, and Minnesota. Louisiana, New York, and New Hampshire have received waivers for some date in 2016 later than Jan. 1.
However, if you’re living in Minnesota, heads up. Starting Jan. 1, 2016, you will need to use your passport to board a plane… not only a plane headed to a foreign country but any plane, even one with a domestic destination. Take care that you don’t find yourself on the outs with the IRS, or you could lose your passport and, with it, your ability to travel by air, period.
When I first wrote about FATCA five years ago, shortly after it was signed into law, some readers wrote to tell me that I was over-reacting… that FATCA wasn’t a big deal for the average person. I don’t mind people writing in with contrary opinions. What I mind is people in denial of reality.
FATCA was a big deal. I recognized that from the first time I read about it, and it has played out to be everything I feared it would be—an expensive stranglehold on the global banking industry and the most horrifyingly extraterritorial piece of legislation in the history of the United States, a bully’s hammer, forcing every banker in the world to play cop for the U.S. government.
On a practical level, FATCA has resulted in the closing of accounts, the closing of whole banks, and the dramatic increase in the cost of banking around the world. It has also led to a dramatic increase in the numbers of Americans choosing to give up their U.S. citizenship each year.
Now we have another similarly horrifying assault by the U.S. government, which has now given the IRS even more control over the activities of the U.S. population.
Please pay attention to this. The U.S. government now can limit your freedom of travel simply by filing a tax lien against you… whether you actually owe any taxes or not.
Let that sink in.
As an attorney friend put it in an email to me this morning, “This is scary stuff… like what happened in 1933-38 Germany in the run-up to World War II…”
This new law is great news for the industry I’m considered part of. The second citizenship business will now boom. It won’t be tax cheats racing to pursue every possible option for obtaining second passports but rather law-abiding citizens who don’t like the idea of the government having the ability to control and restrict their movements.
It’s not easy to get a second citizenship unless you were born with one or have enough cash to buy one. Total costs for an economic citizenship start at around US$200,000 right now for the least expensive option.
For those with European grandparents, you might be eligible for citizenship in Ireland, Portugal, Spain, Italy, or Germany (though Germany doesn’t generally allow for dual citizenship).
The rest of us have to get our second citizenships the old-fashioned way… by earning them through residency. The best current options for this are Paraguay and the Dominican Republic, as these countries have the shortest residency requirements before you’re eligible for naturalization. It’s officially three years in both cases, though the DR has some fast-track options.
The next shortest timeline for citizenship-through-residency is five years. Many countries fall into this category, including Uruguay (though it’s only three years in Uruguay if you’re married), Panama, and Ireland (if you can get residency, which the Irish government has recently made more difficult to do). Portugal is a fairly easy place to get residency, but you must hold residency in the country for six years before you become eligible for citizenship.
Now is the time to get started pursuing whatever second citizenship options you might be eligible for.
I don’t count myself among the fear-mongers and I have no patience for drama. But I admit it. I’m worried. The FAST Act is a big, bad deal.
P.S. I’ve just returned to Panama City after a few days in Las Vegas with some friends, including the attorney I told you about above. The bunch of us raced some fast cars to celebrate one among us turning 50 (not me!). Here’s the group of us:
“Mr. Simon, I was trying to determine which countries tax people’s worldwide income, as I am not living on a Social Security pension. Perhaps others are in the same boat and would be interested in this. Thanks in advance.”
Most countries tax based on worldwide income. Better to think about countries that either have no individual income tax or that tax income on a jurisdictional basis.
Belize, Panama, Malaysia, Nicaragua, Costa Rica, and Thailand all qualify. Thailand taxes according to a remittance-based system meaning income earned outside Thailand isn’t taxed unless it is brought into Thailand in the year it was earned.