Personal Finance

How a ‘seriously delinquent tax debt’ could get your passport revoked

Published

3 months ago

August 25, 2024

Business Finance News

Grace Cary | Moment | Getty Images

Travelers, be warned: The federal government may revoke your passport if you ignore a big tax bill.

Such punishments have become more frequent in recent years, experts said.

Federal law requires the IRS and Treasury Department to notify the State Department if an American has a “seriously delinquent tax debt.”

This is a large federal debt — of more than $62,000 in 2024 — that the taxpayer has repeatedly ignored.

The debt threshold includes aggregate total federal tax liabilities, plus penalties and interest, levied against an individual. It’s adjusted annually for inflation.

The State Department generally won’t issue a new passport and may revoke or limit an existing one in cases of serious delinquency, according to the IRS.

IRS has collected more than $1 billion in tax debt from high-income individuals

The government typically uses this enforcement mechanism — which has been in place since 2018 — as a sort of last-ditch effort to collect unpaid tax levies, experts said.

Should those debts remain unpaid, the potential consequences are ample: Travelers might not be able to take trips overseas until they’ve resolved their debt. Expats and those who travel abroad for business may have to return to U.S. soil indefinitely until their tax case concludes, for example, experts said.

Revoking a passport is “a step of last resort,” said Troy Lewis, a certified public accountant based in Draper, Utah, and an accounting and tax professor at Brigham Young University.

“How do you get rich folks’ attention regarding paying their taxes? Just make sure they can’t summer in Europe,” he said.

‘It gets people to call the IRS’

Demand to travel abroad has surged as the Covid-19 pandemic has waned. Americans applied for about 21.6 million U.S. passports in fiscal 2023 — a record number, according to the State Department.

Todd Whalen, a CPA based in Denver, has seen tax enforcement efforts involving passports ramp up over the past three years.

“This is becoming more and more of a big deal,” said Whalen, founder of Advanced Tax Solutions, which helps consumers and businesses resolve tax debts. “We’ve gotten several [cases] this year.”

In one instance, a client only found out his passport had been revoked while at the airport trying to fly to Mexico for a trip to celebrate his son’s high school graduation.

“It works,” Whalen said of the collection effort. “It gets people to call [the IRS].”

A State Department spokesperson declined to provide annual statistics on how many taxpayers had their passports revoked or denied. The IRS didn’t comment by press time.

All other collections must have been ‘exhausted’

J. David Ake | Getty Images News | Getty Images

It can be “quite easy” for overdue tax debts to exceed the $62,000 threshold, according to Virginia La Torre Jeker, an attorney who specializes in U.S. international tax law.

Americans living abroad, for example, may have “significant penalties” for not filing various foreign information returns, she said in an email.

Debts can also include any tax levies owed by individuals, she added. Those may be business taxes for which the taxpayer is personally liable or trust fund recovery penalties, she said. (The latter relate to withheld income and employment taxes like Social Security taxes or railroad retirement taxes.)

How do you get rich folks’ attention regarding paying their taxes? Just make sure they can’t summer in Europe.

Troy Lewis

accounting and tax professor at Brigham Young University

However, revoking a passport isn’t generally the government’s first way to collect such overdue debts, experts said.

The IRS must have already “exhausted” all other typical collection activities, said Lewis, owner of Lewis & Associates, CPAs.

Generally, that would mean the taxpayer hasn’t responded to prior IRS notices of a federal tax lien, for example. (A lien is the government’s legal claim to a debtor’s assets like real estate and other personal property. It isn’t a move to collect said property, though.)

Various courts have upheld the federal government’s ability to revoke passports in order to collect tax debts as constitutional, Lewis said.

He pointed to two recent cases as examples: Franklin v. United States in the U.S. Court of Appeals for the 5th Circuit and Maehr v. United States Department of State in the U.S. Court of Appeals for the 10th Circuit.

In the former, the defendant, James Franklin, owed about $422,000 in taxes for failing to file accurate tax returns and report a foreign trust of which he was the beneficial owner. The IRS ultimately filed a tax lien and levied his Social Security benefits, and the State Department later revoked his passport.

“It seems pretty well established this is something [the government] can do,” Lewis said.

Travelers have remedies available

The State Department doesn’t revoke a passport straight away. When the IRS certifies debt as seriously delinquent and alerts the State Department of that, it will mail the taxpayer a notice — CP508C — outlining the potential implications of that classification.

If an individual then applies for a passport, the State Department would generally deny and close that application if the person doesn’t make efforts to pay their debts. Such efforts might include paying the balance in full, entering into a payment plan or making a compromise agreement with the IRS.

The debtor would still be able to use an active passport, if they have one, unless notified in writing by the State Department that their passport had been revoked or limited, the IRS said.

Travelers are finally cracking under the pressure of high costs

“IRS looks at various factors, including taxpayer noncompliance in the past and taxpayer failure to cooperate with the IRS” when opting to revoke a passport, according to La Torre Jeker.

The State Department can limit the passport’s use only to return travel to the U.S., thereby preventing the person “from being trapped in limbo” if outside the country, she said.

The IRS sends taxpayers Letter 6152 before revocation, asking them to call the IRS within 30 days in order to resolve their account and avoid passport cancellation, she added.

Still, sometimes passport denial catches debtors by surprise when they travel, said Whalen at Advanced Tax Solutions.

For example, the IRS may have the wrong address on file — especially if a taxpayer has moved — and mail notices to the wrong place, Whalen said.

“A lot of times, they don’t know they have a balance due until they … show up at the airport,” he said.

Personal Finance

Why Trump’s tax plans could be ‘complicated’ in 2025, policy experts say

Published

21 minutes ago

November 19, 2024

Business Finance News

U.S. President-elect Donald Trump speaks during a meeting with House Republicans at the Hyatt Regency hotel in Washington, D.C., on Nov. 13, 2024.

Allison Robbert | Via Reuters

Congressional lawmakers will soon debate expiring tax breaks and new promises from President-elect Donald Trump.

Agreeing on cuts and spending, however, could be a challenge.

With a majority in the House of Representatives and Senate, Republican lawmakers can pass sweeping tax legislation through “reconciliation,” which bypasses the Senate filibuster. Republicans could begin the budget reconciliation process during Trump’s first 100 days in office.

But choosing priorities could be difficult, particularly amid the federal budget deficit, policy experts said Tuesday at a Brookings Institution event in Washington.

Legislators will be “representing their districts, not their party,” Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center, said Tuesday in a panel discussion at the Brookings event.

“This is a lot more complicated than just the reds against the blues,” he said.

‘Political divisions’ could be a barrier

With a slim majority in Congress, Republican lawmakers will soon negotiate with several blocks within their party. Some of these groups have competing priorities.

Enacted by Trump in 2017, the Tax Cuts and Jobs Act, or TCJA, is a key priority for the next administration.

Without action from Congress, trillions of tax breaks from the TCJA will expire after 2025. These include lower tax brackets, higher standard deductions, a more generous child tax credit, bigger estate and gift tax exemption, and a 20% tax break for pass-through businesses, among other provisions.

The more things you try to bring in, the more potential political divisions we have to navigate.

Molly Reynolds

senior fellow in Governance Studies at Brookings Institution

Tax bill could take longer than expected

Since budget reconciliation involves multiple steps, policy experts say the Republican tax bill could take months.

Plus, Congress has until Dec. 20 to fund the government and avoid a shutdown. A stopgap bill could push the deadline to January or March, which could take time from Trump’s tax priorities.

“The idea that they’re going to do this in 100 days, I think, is foolish,” Gleckman said. “My over-under is Dec. 31, 2025, and that might be optimistic.”

However, the bill could get through by Oct. 1, 2025, which closes the federal government’s fiscal year, other policy experts say.

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Personal Finance

Why it helps to file early

Published

2 hours ago

November 19, 2024

Business Finance News

We are overly reliant on student loans to fund higher education, says NACAC CEO Angel Perez

This week, the new Free Application for Federal Student Aid expanded its “phased rollout” so all students can now apply for aid for the upcoming academic year.

Up until Monday, the 2025-26 FAFSA was only available to limited groups of students in a series of beta tests that began on Oct. 1.

Now, the form is open to all and the Department of Education has said it will be out of testing entirely by Nov. 22 — which puts the official launch ahead of schedule.

Typically, all students have access to the coming academic year’s form in October, but last year’s new simplified form wasn’t available until late December after a monthslong delay.

This year, the plan was to be available to all students and contributors on or before Dec. 1.

Students who submit a form during this final “expanded beta” phase before Nov. 22 will not need to submit a subsequent 2025–26 FAFSA form, the education department said.

There are still some issues with the new form, some of which also plagued last year’s college aid application cycle, but they all have workarounds, according to higher education expert Mark Kantrowitz.

Altogether, this year’s rollout is “much better than last year,” he said.

Last year, complications with the new form resulted in some students not applying at all. Ultimately, that meant fewer students went on to college.

Why it’s important to file the FAFSA early

“Students should take full advantage of the early rollout and submit their FAFSA as soon as possible,” said Shaan Patel, the CEO and founder of Prep Expert, which provides Scholastic Aptitude Test and American College Test preparation courses.

The earlier families fill out the form, the better their chances are of receiving aid, since some financial aid is awarded on a first-come, first-served basis, or from programs with limited funds.

“The earlier you apply, the better your chances of securing more aid that doesn’t need to be repaid,” Patel said.

“Submitting early also means you’ll receive your financial aid award letters sooner,” he said. “This gives you ample time to compare offers from different schools and make an informed decision without feeling rushed. Finally, knowing your child’s financial aid status earlier reduces stress and allows your family to focus on other important aspects of college preparation.”

For many students, financial aid is key.

Higher education already costs more than most families can afford, and college costs are still rising. Tuition and fees plus room and board for a four-year private college averaged $58,600 in the 2024-25 school year, up from $56,390 a year earlier. At four-year, in-state public colleges, it was $24,920, up from $24,080, the College Board found.

The FAFSA serves as the gateway to all federal aid money, including federal student loans, work-study and especially grants — which have become the most crucial kind of assistance because they typically do not need to be repaid.

Submitting a FAFSA is also one of the best predictors of whether a high school senior will go on to college, according to the National College Attainment Network. Seniors who complete the FAFSA are 84% more likely to enroll in college directly after high school, according to an NCAN study of 2013 data.

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Personal Finance

89% of Americans do not consider themselves wealthy, Fidelity finds

Published

5 hours ago

November 19, 2024

Business Finance News

Why so many young adults are still living with their parents

Inflation is cooling and wages are rising. Yet, few Americans — including millionaires — feel confident about their financial standing.

Across all income and asset levels, 89% of Americans said they do not consider themselves wealthy, according to Fidelity Investments’ State of Wealth Mobility study. Fidelity polled 1,900 adults in August.

“Only one-tenth of Americans consider themselves wealthy today — despite many having considerable wealth,” said Rich Compson, head of wealth solutions at Fidelity Investments.

For most Americans, the definition of what it means to be wealthy is relatively modest, with 71% saying being wealthy is simply the ability to not have to live paycheck to paycheck.

Roughly 57% said wealth also entails traveling and taking vacations, while 56% said it’s being able to pass down money to the next generation.

Nearly half — 49% — said feeling wealthy meant the ability to own a home, Fidelity found.

For high-net worth individuals, or those with $1 million or more in savings and investable assets not including real estate or retirement funds, more households associated wealth with traveling and fewer said a major criterion for feeling wealthy was not living paycheck to paycheck.

Surprisingly, the same share — 49% — said being wealthy meant owning a home.

Obstacles to feeling wealthy

Housing affordability has become a major hurdle.

High home prices and higher mortgage rates along with low inventory have put ownership just out of reach for many households.

One “silver lining” is that affordability has improved somewhat since October 2023, when mortgage rates were near 8%, according to a new analysis by Freddie Mac.

Jose Luis Pelaez Inc | Digitalvision | Getty Images

Although vacationing has also gotten more expensive, Americans are still determined to travel.

Travel spending among households continues to outpace its pre-pandemic levels, some reports show.

However, concerns about high prices are playing a larger role in keeping some would-be vacationers home. Those that are travelling have had to adjust their budgets accordingly, spending roughly 10% more compared to 2023, according to another study by Deloitte.

Rising debt is another threat to wealth

At the same time, rising consumer debt has weighed on household balance sheets. Nearly half, 44%, of Americans said credit card debt is the biggest threat to their ability to build wealth, according to a separate report by Edelman Financial Engines.

Americans now owe a record $1.17 trillion on their credit cards, and the average balance per consumer stands at $6,329, up 4.8% year over year, according to the Federal Reserve Bank of New York and TransUnion, respectively.

“High interest rate credit card debt, more than other sorts of debt, is a savings killer, because when you have it, you have to feed the beast. You can’t save, you can’t invest,” Jean Chatzky, personal finance expert and CEO of HerMoney.com, told CNBC in September.

“That stands in the way of people building actual wealth and therefore feeling wealthier,” she said.

What it would take to feel rich

Most people — roughly 65% of those polled — said they would need $1 million in the bank to consider themselves wealthy, although 28% said it would take at least $2 million and 19% put the bar at $5 million or more, Edelman Financial Engines found.

Among current millionaires, 68% said they would need at least $3 million and 40% said feeling wealthy would require $5 million of more.

Edelman Financial Engines polled more than 3,000 adults over age 30 from June 12 to July 3, including 1,500 affluent Americans with household assets between $500,000 and $3 million.

When it comes to their salary, 58% of all of those surveyed said they would need to earn $100,000 on average to not worry about everyday living expenses, and a quarter said they would need to earn more than $200,000 to feel financially secure.

In most cases, feeling financially secure is not based on how much you earn, but rather a commitment to save more than you spend, maintain a well-diversified portfolio and work with a financial advisor, experts often say.

“Having confidence in being able to invest strategically is what often separates those who feel they are wealthy from those who don’t,” said Fidelity’s Compson. “Improved confidence starts with education and planning.”

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