IRS Notice CP508C: Can I Lose my Passport (with Examples)

Does an IRS Notice CP508C Mean You Lose Your Passport

Does an IRS Notice CP508C Mean You Lose Your Passport?

When U.S. Taxpayers living in the U.S. or abroad have not complied with the Internal Revenue Service tax and reporting rules, the Internal Revenue Service has various mechanisms at their disposal to go after taxpayers to enforce tax liabilities and to collect debts. The IRS may issue fines and penalties, file a notice of federal tax lien, issue a notice of federal tax levy, seize property, and even deny or reject a passport application or renewal. Only recently in the past five-to-10 years (FAST Act) has the IRS been empowered to pursue a Taxpayer’s passport to facilitate tax compliance. IRS passport denial and revocation is completely unfair to taxpayers, especially because oftentimes the reason the taxpayer is out of compliance is that they are an expat living overseas and simply unaware of the continuing requirement for U.S. persons to file U.S. tax returns. Let’s look at some of the basics of Section 508C and how IRS passport restrictions work using some examples.

Example Language From CP508C

The CP508C letter is a notice from the IRS letting the taxpayer know that they may be subject to a passport denial or revocation due to a seriously delinquent tax debt:

Sample Language:

• • • “On December 4, 2015, as part of the Fixing America’s Surface Transportation (FAST) Act, Congress enacted Section 7345 of the Internal Revenue Code, which requires the Internal Revenue Service to notify the State Department of taxpayers certified as owing seriously delinquent tax debt. The FAST Act generally prohibits the State Department from issuing or renewing a passport to a taxpayer with seriously delinquent tax debt. We have certified to the State Department that your tax debt is seriously delinquent. We show that you still owe $450,000. This amount includes penalty and interest computed to 30 days from the date of this notice. This notice only includes the portion of your tax debt that has been certified to the State Department as seriously delinquent, as defined below. You may have additional tax debt that is not included in this notice.”

Failure to File Returns (Unaware)

One of the most common reasons that a taxpayer finds themselves in jeopardy of a passport denial or revocation is because they did not file tax returns — and usually, this is because the taxpayer was unaware that when they live overseas they are still required to file U.S. tax return.

• • • Example: Adam is a U.S. citizen who recently took an assignment overseas. He files foreign tax returns but was unaware he was required to file U.S. tax returns as well and as a result, Adam owes hundreds of thousands of dollars in past taxes due to the IRS. Adam may be at risk for a passport revocation or denial.

    • Example: Amanda is a U.S. citizen who works in a foreign country that does not tax individuals on personal income tax. Therefore, Amanda does not pay any income tax in the foreign country on her employment earnings. As a result, she was unaware that she was required to file U.S. tax return to report her income. Amanda may be at risk for a passport revocation or denial.

Taxpayers Must Claim the Foreign Earned Income Exclusion

When a person qualifies for the Foreign Earned Income Exclusion (FEIE), they may reduce or eliminate a certain amount of U.S. tax on their foreign employment or related income. The problem is that some taxpayers misunderstand that if they qualify for the Foreign Earned Income Exclusion it means they do not have to file a tax return at all,  but rather they must file a tax return and claim the exclusion amount.

• • • Example: Brenda is a U.S. citizen who works outside of the United States and makes less than the Foreign Earned Income Exclusion each year. Since she makes less than the annual FEIE she was under the mistaken belief that she did not have to file U.S. tax returns.  Because Brenda stopped filing U.S. tax returns, she did not report her FEIE on IRS Form 2555. Thus, the IRS is unaware of her status and therefore they filed SFR (Substituted Filed Return) returns for her without claiming FEIE — and now she has more than $200,000 in tax liability over the past years. Brenda may be at risk for a passport revocation or denial.

Foreign Tax Credits Must Also be Claimed on the Tax Return

Foreign Tax Credits are another way a taxpayer may reduce or eliminate certain U.S. taxes. If a U.S. taxpayer pays taxes overseas on the income that they earned, they may be able to apply those credits to the U.S. tax liability of the foreign income to reduce or possibly eliminate tax liability. The problem is that the taxpayer must report the foreign tax credits to the IRS on their tax returns in order to apply the credits. So if the taxpayer does not report the foreign tax credits to the IRS, then the IRS does not know about them and they cannot be applied to the taxpayer’s tax liability on the foreign income.

• • • Example: Charlene is a U.S. citizen who is currently working in a foreign country and earns high six-figures in income each year. She pays a significant amount of taxes in the foreign country and therefore was unaware that she was required to report her income on her U.S. tax return as well as claim the foreign tax credits. Unfortunately, Charlene may be at risk for a passport revocation or denial.

What About FBAR Non-Compliance?

It is important to note that tax liability is not the same as penalty assessments. If a taxpayer does not have a seriously delinquent tax debt but has been assessed FBAR penalties, the outstanding FBAR penalties are not sufficient for a passport revocation or denial. As provided by the IRS:

• • • What tax debts aren’t certified to the State Department?

      • Seriously delinquent tax debts do not include:

        • Child support

        • Debts being timely paid through IRS-approved installment agreements,

        • Debts being timely paid with an offer in compromise accepted by the IRS,

        • Report of Foreign Bank and Financial Account (FBAR) penalties, 

        • Settlement agreements entered into with the Department of Justice,

        • Debts for which a collection due process hearing regarding a levy to collect the debt has been timely requested. or

        • Those suspended because of a request for innocent spouse relief.  

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.