Avoid Passport Revocation with this Tax Compliance Update
I love when our Escape Artist readers give me feedback, sharing their knowledge with me. Last month I received an email regarding one of my articles and was excited to know that one reader wanted to share his thoughts and a possible correction with me regarding reporting requirements for offshore ownership of structures.
I also have important information that I’ve gained from one of our tax experts concerning passports revocation by the IRS due to tax issues. This obviously prompts the question, “Can you travel if you owe taxes?” If the IRS is confiscating passports for failure to pay taxes, we need to understand exactly when, how, and why.
The most important issue right now is the confiscation of passports for failure to file taxes. Our offshore tax specialist, Morey Glazier, has received communications from clients who have been affected by this new procedure. Today we will take a look at these emails and what they mean for US citizens traveling abroad and the ability to get or maintain a US passport.
Email from Morey Glazer:
“We have started hearing from individuals that the IRS has begun confiscating passports. This is really a big issue, and everyone needs to get their returns filed and taxes paid as soon as possible.
Per the IRS: If you have seriously delinquent tax debt, IRC § 7345 authorizes the IRS to certify that debt to the State Department for action. The State Department generally will not issue a passport to you after receiving certification from the IRS. Seriously delinquent tax debt is an individual’s unpaid, legally enforceable federal tax debt totaling more than $52,000 (including interest and penalties). If your passport is cancelled or revoked, after you’re certified, you must resolve the tax debt by paying the debt in full, making alternative payment arrangements or showing that the certification is erroneous.
You still might have your passport revoked if you have not filed as the IRS does not know how much you owe.”
“Actually, it is also a problem if you have not filed, as the IRS does not know the amount you might owe. We just had a client who showed up in the United States and had not filed in 4 years and lives in a foreign country. Her passport was confiscated, and she could not get back to her home in a foreign country to even get her information. We had to track her information down via transcripts etc… and file the returns by calling banks to get 1099s and W2s”
Another recent e-mail from Morey:
“Mike, I just heard from two clients who have not filed tax returns who thanked me as they were flying to Canada to do a flooring job. My email stopped them from going. They would have lost their passports when they came back to the US.
They couldn’t come to the seminar as they have to get their returns done and then have to go to Canada to do their work.
Just thought you would like to hear the story.
Thanks, Morey”
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The fact of the matter is, the IRS has repeated their warning that taxpayers could run into trouble obtaining or renewing their passports if they have outstanding federal tax debt. According to the provisions of the Fixing America’s Surface Transportation (FAST) Act, if a taxpayer has significant tax debt of $52,000 or more, the IRS will notify the State Department, giving them the authority to not only deny passport application or renewal, but also to revoke any valid passports.
Luckily there are relief programs offered by the IRS, as well as exemptions from passport revocation for those in situations such as bankruptcy, victims of fraud or identity theft, individuals located in disaster areas or any other IRS accepted adjustment. While Morey is not the only accountant who can handle these types of offshore tax issues, he is one of the best.
Our next topic this week comes with a bit of reader feedback. Earlier this year I wrote an article about structures and the reporting requirements for them. One of our readers, Bruce, pointed out that I was incorrect on my Mexican comments regarding reporting requirements for fideicomiso property ownership. After checking with Morey, I stand corrected. Bruce, you were right. Your email to me, Glazer’s response, and the IRS section code of this can be found below.
Email from a reader, Bruce, about the previous tax and compliance article:
”Hi Michael,
I noticed in your Escape Artist email of today that you say that holders of a Mexican fideicomiso are required to “report it every year on Form 8938” as if it were a financial asset. That is not my understanding and I’d appreciate your thinking regarding this. I’m not trying to pick a fight…just trying to understand what it is I may not understand. Under FATCA I have thought that only foreign financial assets (exceeding $50,000 at any time) must be reported on Form 8938 and that as a result of Revenue Ruling 2013-14 the IRS does not treat the typical Mexican fideicomiso as a trust..
NOTE: I was the owner of a small company in Puerto Penasco, Sonora, Mexico that provided escrow and closing services for hundreds of bank-trust-property transactions over many years. Concurrently, I was an accounting professor at Arizona State University for 25 years. Now I am retired and only handle a few transactions when “special” prior clients ask me to do so.
I appreciate your help in correcting my understanding.
Many thanks,
Bruce B.”
Reply from Mike:
“Bruce thank you for your email and question about the feed me so structure in Mexico. I stand corrected. I wasn’t sure myself, so I double checked with Morey Glazer who confirms your understanding of how the US treats the fee taken is correct.”
Reply from Morey:
“Fideicomiso is not considered a “trust” by the IRS. The IRS ruling he quotes did specifically state that fideicomiso was not a trust. The implication then is that there is no entity to report and the land then would be considered to be held personally, not via an entity. Real estate held personally, not via an entity, is not a reportable asset on Form 8938..”
According to Treasury Regulation § 301.7701-4, the Mexican Federal Constitution does not permit foreigners to directly hold the title to residential real property in certain areas of Mexico, known as restricted zones. Foreigners can, however, keep residential real property located in the restricted zones through a Mexican Land Trust, or fideicomiso, with a Mexican bank once they obtain a permit through the Mexican Ministry of Foreign Affairs.
Well, as we can see, the rules and complexities for compliance reporting and staying legal can be challenging. Buying property and doing business overseas can be a wonderful experience but we absolutely must stay compliant. I appreciate the reader feedback. Thank you, Bruce. At least here’s one place that there are no reporting requirements for an offshore investment in Mexico.
Have a great week everybody. Thanks, Mike.
Michael K. Cobb is the CEO and co-founder of ECI Developments which has properties throughout Latin America. He speaks all over the world on international real estate and is a board member of the National Association of Realtors.
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