U.S. Department of State
Revocation or Denial of U.S. Passport: More on new section 7345 (Title 26/IRC) and USCs with “Seriously Delinquent Tax Debt”
New Section 7345 completely modifies how U.S. citizens (“USCs”) living and traveling around the world have to now consider very seriously actions taken by the Internal Revenue Service (“IRS”). It is the IRS which now holds the power under this new law that requires the U.S. Department of State (“DOS”) to revoke or deny to issue a U.S. passport in the first place.
New Section 7345(e) provides in relevant part as follows: “upon receiving a certification described in section 7345 of the Internal Revenue Code of 1986 from the Secretary of the Treasury, the Secretary of State shall not issue a passport to any individual who has a seriously delinquent tax debt described in such section. . . ” [emphasis added].
This new law mandates (not at the discretion of the DOS) that various U.S. passports be denied at the direction of the IRS. Once the IRS issues the certification of “seriously delinquent tax debt.”
All it takes, is for the IRS to claim tax or penalties are owing of at least US$50,000 through an assessment (plus start a lien or levy action).
Of course, US$50,000 sounds like a large sum for many modest USCs, until an individual understands that there are a host of international reporting requirements for taxpayers. Specifically, the IRS can impose a US$10,000 penalty for each violation of failing to complete and file various IRS information forms; EVEN IF NO income 
taxes are owing. See IRS website – FAQs 5 and 8 regarding civil penalties (see also How is the offshore voluntary disclosure program really working? Not well for USCs and LPRs living overseas).
For a summary of these forms and filing requirements, see a prior post, Oct. 17, 2015, Part II: C’est la vie Ms. Lucienne D’Hotelle! Tax Timing Problems for Former U.S. Citizens is Nothing New – the IRS and the Courts Have Decided Similar Issues in the Past (Pre IRC Section 877A(g)(4))
Indeed, our office has seen and assisted numerous taxpayers around the world where the IRS has assessed tens of thousands, hundreds of thousands and in some cases in excess of US$1M (in proposed assessments) against an individual for failure to simply file information reporting forms. See, for instance, a prior post on Nov. 2, 2015, Why Most U.S. Citizens Residing Overseas Haven’t a Clue about the Labyrinth of U.S. Taxation and Bank and Financial Reporting of Worldwide Income and Assets
Also, we have seen several IRS assessments of income tax (not just penalties) against individuals of hundreds of thousands of dollars which are not supported by the law. For instance, it is not uncommon for the IRS to issue a “substitute for return” alleging income taxes owing. See, How the IRS Can file a “Substitute for Return” for those USCs and LPRs Residing Overseas, posted Nov. 8, 2015. We have a number of those cases pending, where the IRS has taken erroneous information and made such assessments against USCs residing and working outside the U.S. for much if not most of their professional lives.
New Section 7345 requires that USCs, wherever they might reside, take great care in knowing about any actions the IRS might be taking against them; as to tax and penalty assessments, whether or not they are supported under the law.
One basic method of learning more about the activities of the IRS is to make a transcript request directly to the IRS regarding the status of a USC’s federal tax status according to IRS records. See, IRM, Part 21. Customer Account Services . . . Section 3. Transcripts.
It is also possible for the USC to obtain additional tax information from the IRS through a Freedom of Information Act (“FOIA”) request.
Denial of U.S. Passports: President Obama and Congress Pass Law that will Require Department of State to Deny a U.S. Passport for a “Seriously Delinquent Taxpayer”
Entry in and out of the U.S. has just gotten more problematic under a new law for those U.S. citizens who the IRS asserts owes taxes. A new statutory concept has been added to the tax law called “seriously delinquent tax debt”; which is defined by new IRC Section 7345 as a tax that has been assessed, is greater than US$50,000, and where a notice of lien has been filed or levy made.
Prior posts have addressed current legal requirements surrounding social security numbers for U.S. federal tax compliance purposes. See, USCs without a Social Security Number (and a Passport) “Cannot?” Travel to the U.S., posted on May 17, 2015.
Other posts have focused on the dilemma facing U.S. citizens (USCs) who have no social security number (“SSN”). See an older post (23 July 2014) – Why do I have to get a Social Security Number to file a U.S. income tax return (USCs)?
The Joint Explanatory Statement of the Committee of the Conference provides the key provisions summary of the law as follows:
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Part II: U.S. Department of State has Allowed (Starting in at least 2013) USCs to Keep their U.S. Passports After Oath and Prior to Receiving CLN
See the first post on this topic: U.S. Department of State has Allowed (Starting in at least 2013) USCs to Keep their U.S. Passports After Oath and Prior to Receiving CLN, Posted on March 17, 2015
A U.S. citizen is required to have a U.S. passport to enter the U.S., according to the immigration law regulations 22 CFR § 53.1 require that a U.S. citizen have a U.S. passport to enter or depart the United States. The relevant part of the regulations is § 53.1(a) which provides as follows:
Passport requirement; definitions.
The U.S. Department of State does not always provide any specific document, e.g., a certified copy of any of the following documents, after you take the oath of renunciation:
Form DS-4080, Oath of Renunciation of the Nationality of the United States.
Not having a U.S. passport can of course be problematic if the individual needs to travel in or out of the U.S. for a period of time after taking the oath, but before receiving the CLN. See, The Importance of a Certificate of Loss of Nationality (“CLN”) and FATCA – Foreign Account Tax Compliance Act, Posted on June 1, 2014
Fortunately, I have been told by several Chiefs of American Citizen Services in different U.S. Consulates and U.S. Embassies that they have been advised from Washington that they are NOT required to physically take the U.S. passport, until after the issuance of the CLN. This now seems to be consistent practice throughout the world, and most all Chiefs of American Citizen Services use this approach, based upon my personal experience with different clients.
Will 2015 Be a Record Year for Citizenship Renunciations?
The First Quarter of 2015 saw a large number of published names of former U.S. citizens: 1,335 total for the first quarter.
In addition, the second quarter saw a total of 460, for a 
cumulative total for the year (mid way through the year of 1,795). At this pace, the year 2015 could be a slight record of U.S. citizenship renunciations compared to the record year of 2014.
See, New Record of U.S. Citizens Renouncing – The New Normal
The names of each citizen can be located in the list published in the Federal Register.
There are a number of key considerations and strategic decisions that most all U.S. citizens need to consider prior to renouncing citizenship. See, for instance –
The “Hidden Tax” of Expatriation – Section 2801 and its “Forever Taint.”
Can the U.S. Federal Government Bar Entry into the U.S. to a U.S. Citizen without a U.S. Passport?
Global Entry, SENTRI and NEXUS after Renouncing – the “Trusted Traveler Programs” – SAFE TRAVELS!
U.S. Department of State has Allowed (Starting in at least 2013) USCs to Keep their U.S. Passports After Oath and Prior to Receiving CLN
Washington Post journalist, Ms. had an interesting article on March 3, 2015, titled Yes, the State Department can jump on a problem and fix it in record time.
The focus of the article was that the U.S. Department of State can indeed fix a problem (in this case how and when U.S. passports are taken from U.S. citizens who take the oath of renunciation).
The article was a bit of a surprise to me, as I have had experience with several clients where the Consulate offices have indeed allowed the U.S. citizen to physically maintain their U.S. passport after taking the Oath of Renunciation (Form DS-4080, Oath of Renunciation of the Nationality of the United States) but prior to actually receiving the “Certificate of Loss of Nationality” (“CLN”).
After a U.S. citizen has formally renounced (or relinquished) their U.S. citizenship, the U.S. Department of State provides a CLN. This form can be located here at – Certificate of Loss of Nationality of the United States, Form DS-4083 (CLN)
You can go to the page “U.S. Department of State” under “Resources” for further U.S. Department of State Documents related to loss of nationality.
Sometimes, the U.S. Department of State will take several months to process the file in Washington D.C., before they actually issue the CLN. I have had cases (worst case scenarios) that take upwards of 9-10 months. See, The IRS does not give a “Certificate of Expatriation” or similar tax document . . .
However, my experience on several cases is that consular officer will generally allow t
he individual to physically keep the U.S. passport until the CLN is actually issued and received by the individual in exchange for their passport. This has been the case for some 2 +/- years.
This procedure has been formalized in the Foreign Affairs Manual which added the additional key language in paragraph (4) regarding U.S. citizens who need their passport for travel to the U.S.
Part II: U.S. Department of State Communications to USCs overseas Regarding Tax Obligations with IRS
A recent post discussed a rather surprising development of how the – U.S. Department of State, Starts Communicating with U.S. Citizens Overseas Regarding Tax Obligations with the IRS
There are several observations to be made about this approach.
First, some USCs living overseas will find this a welcome development, as it provides a method of 
basic education of how U.S. tax laws work. The newer U.S. passports do have an obscure reference to U.S. tax obligations of USCs. In the past, there was generally no communications from the U.S. Department of State to USCs, including newly naturalized U.S. citizens about their U.S. tax obligations.
Second, there is much helpful information provided in the U.S. Department of State’s explanation. The key tax forms that are most relevant for USCs and LPRs residing overseas are explained in the government e-mail. See, USCs and LPRs Living Outside the U.S. – Key Tax and BSA Forms
All of the following forms are identified by the U.S. Department of State:
- Substantive Income Tax Forms (Affecting Tax Liability)
- Foreign Earned Income Exclusion – IRS Form 2555
- Foreign Tax Credits – IRS Form 1116
- Information Tax Forms (Not Affecting Tax Liability, but with Substantial Penalties for Failure to File)
- IRS Form 8938 Statement of Specified Foreign Financial Assets
- Foreign Bank Account Reports (“FBAR”) – FinCEN Form 114, Report of Foreign Bank and Financial Accounts through the BSA E-Filing System website.
These are the most relevant forms for the majority of USCs and LPRs; although there are numerous other forms and calculations that may be required depending upon the particular circumstances, income, assets, employment, etc. for each individual
The third observation, relates to how employees of the U.S. Department of State will use this information and communicate with USCs? Will they begin asking (even if infrequently) whether a U.S. citizen overseas is in compliance with their U.S. federal tax requirements? What are the consequences to the U.S. citizen if they state yes, no or refuse to answer? What can happen to an individual if they provide a false statement to a federal employee or file a false document? See What could be the focal point of IRS Criminal Investigations of Former U.S. Citizens and Lawful Permanent Residents?
The fourth and last observation, is whether the IRS will begin providing USC taxpayer information on a regular basis to the U.S. Department of State? The law provides limitations upon how the IRS can disclose and provide taxpayer information. See, 26 U.S. Code § 6103 – Confidentiality and disclosure of returns and return information
However, there are significant exceptions in the law, that do allow disclosure of taxpayer financial and taxpayer information to other agencies (particularly “Intelligence Agencies,” which presumably includes the U.S. Department of State). See, for instance, IRC Section 6103(i)(7). The statutory requirements of 6103(i)(7) are not particularly rigid.