US expats fear loss of passports as tax regulations kick in
Americans are at risk of losing their passports, if they don’t pay their taxes. Experts and citizens say it’s becoming harder to be an American living abroad
A new tax collection provision which took effect on January 1 has prompted concerns among United States citizens living and working abroad — including tens of thousands in Hong Kong — that they could lose their passports if they fall foul of the taxman.
A new rule approved by the US congress in December gives the State Department the authority to revoke, deny or limit passports for anyone the country’s Internal Revenue Service decides has a seriously delinquent tax debt, that is U$50,000 or more, including tax, interest, and penalties.
Part of a new highway funding bill aimed at raising tax dollars to pay for infrastructure projects in the United States, the measure has sparked criticism from experts and raised concerns among some seven million Americans living abroad.
Cheryl Gilbert, 47, has lived overseas for 19 years, the last two of which she has spent in Hong Kong .
Despite not being directly affected , Gilbert is worried the new provision might deter Americans from venturing overseas to live and work.
“I’m concerned about the general trend towards making it difficult for US citizens to live and work overseas. I believe it hurts the careers of many ordinary US citizens and damages the interests of US global business,” she said.
Charles M. Bruce, legal counsel for American Citizens Abroad, a non-profit organisation based in Washington DC, described the use of an individual’s passport as a “lever” as too harsh for an American living overseas , adding: “They will be afraid that their lives can be ruined.”
He fears mistakes in the system which are not the fault of individual tax payers said could lead to “terrible” consequences.
The total number of US citizens in Hong Kong is unclear but some 85,000 are registered with the American Consulate.
The president of the American Chamber of Commerce in Hong Kong, Richard R. Vuylsteke, criticised the fact that the new rule wasn’t a subject of a hearing, where taxpayers affected and advocating groups could give testimony.
Although Vuylsteke agreed that all taxpayers have an obligation to fulfil their legal obligations, he expressed concerns over the fact that “the cumulative impact of US tax laws on US citizens abroad is not well appreciated in Washington DC.”
He also said that the “enactment of this legislation comes at a time when the ability of the IRS to render services to taxpayers overseas to help them ‘work out’ their collection problems, are severely reduced.”
Kurt Rademacher, director of international tax practice at Butler Snow Singapore LLP, also expressed concern.
“In a perfect world, where mechanisms worked, this provision could be acceptable, but in the real world in which systems are far from perfect, the law has just become incredibly unfair and draconian,” noted Rademacher, who has advised hundreds of clients struggling to meet the American tax law requirements over the years.
The IRS heavily relies on notices and letters to communicate with citizens about their tax obligations, a system of operation with which federal watchdogs have identified problems.
“The IRS absolutely needs to change their notification system,” Rademacher said. “They should not apply a penalty like that when they are so short-staffed, and their computer systems are so antiquated that they cannot even be sure that they notified the people. That’s not fair, maybe not constitutional, but certainly not fair.”
According to the Joint Committee on Taxation, the IRS’s new powers are expected to raise $398 million over 10 years.