Guest written by Demetre Vasilounis, Student-at-Law
For those with assets in, or some other connection to, the United States, it is important to take note of the fact that the country’s Internal Revenue Service (IRS) has gained one more tool to enforce tax liabilities on taxpayers. That tool is the power to revoke, limit or deny the issuance of a U.S. passport.
U.S. Congress first enacted this controversial power on December 4, 2015 through its Fixing America Surface Transportation (FAST) Act. Section 32101 of the FAST Act added a new provision to the Internal Revenue Code (IRC): Section 7345, titled “Revocation or denial of passport in case of certain tax delinquencies”. The section penalizes individuals with “seriously delinquent tax debts”, which the IRS defines as “generally someone who owes the IRS more than $51,000 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”.
The enforcement process is as follows:
- The IRS files a Notice of Federal Tax Lien against an individual owing $51,000 USD or more in back taxes, penalties and/or interest.
- If the individual unsuccessfully exhausts all administrative remedies to challenge the lien, fails to challenge the lien before the time for challenging it lapses, or if the IRS has issued a levy to the individual, the IRS will notify the individual with a Notice CP 508C.
- The Notice CP 508C indicates that the IRS has notified the Department of State (which controls passports).
- The Department of State then decides what happens with the individual’s current/future passports. According to the IRS, the Department of State “generally will not issue a passport” to individuals whom it certifies, but penalties include revocation and limitation of existing passports.
So, what are the potential implications for Canadians with assets in/ties to the U.S., particularly from an estate planning perspective? The legislation does not seem to address international passports, so it does not seem to impact individuals who do not own and do not want to own U.S. passports. However, for individuals who both do or hope to own such passports, it is important for these individuals to make sure that they have no outstanding tax liabilities, particularly in the amount of $51,000 USD or more. Testators with U.S. assets should be particularly mindful of this should any of their beneficiaries who will acquire these U.S. assets own or hope to own a U.S. passport.
For individuals whom the IRS certifies, there are ways to reverse their certification (assuming that such certification is not erroneous or unenforceable):
- paying the tax debt in full;
- paying the tax debt punctually under an approved installment agreement;
- paying the tax debt punctually under an accepted offer in compromise;
- paying the tax debt punctually under the terms of a settlement agreement with the Department of Justice;
- having requested or have a pending collection due process appeal with a levy; or
- having collection suspended because a taxpayer has made an innocent spouse election or requested innocent spouse relief.
The IRS has more information about these solutions on its website. It is also important to note that the IRS will not certify individuals with “seriously delinquent tax debts” in certain circumstances, such as bankruptcy, identity theft or “due to hardship” (although it is unclear what that means).
This is just one of the many potential issues for Canadians who have assets in/ties to the U.S. A person in any such situation should seek advice from both Canadian and U.S. counsel to ensure that they are aware of all of their potential tax liabilities.