Israel: Renewing Your US Passport? The IRS Will Know About It

Individuals who renew their US passport need to take into consideration that their Social Security Number (SSN) and country of residency will be forwarded to the IRS.

Since July 2014, the passport renewal instructions forms have dedicated a specific paragraph detailing this new procedure: “Section 6039E of the Internal Revenue Code (26 USC 6039E) requires you to provide your Social Security Number (SSN), if you have one, when you apply for a US passport or renewal of a US passport…. If you are residing abroad, you must also provide the name of the foreign country in which you are residing. The US Department of State must provide your SSN and foreign residence information to the US Department of Treasury. If you fail to provide the information, you are subject to a $500 penalty enforced by the IRS….”

Section §6039E(b)(4) grants the IRS the authority to require any additional information as it may prescribe. Currently what is requested is the applicant’s full name and, if applicable, previous name; permanent address and, if different, the applicant’s mailing address; taxpayer identifying number (TIN); and date of birth.

As stated in Section 6039E, the IRS may impose a $500 penalty on a passport applicant who fails to provide the required information. Before assessing the penalty, the IRS will provide to the passport applicant written notice of the potential assessment of the penalty. A passport applicant has 60 days from the date of the notice of potential assessment of the penalty, or 90 days from such date if the notice is addressed to an applicant outside the United States, to respond to the notice. If the passport applicant demonstrates to the satisfaction of the Commissioner or the Commissioner’s delegate that the failure to provide the required information is due to reasonable cause and not due to willful neglect, after considering all the surrounding circumstances, then the IRS will not assess the penalty. This factual determination by the IRS is made on a case-by-case basis and involves consideration of all the surrounding circumstances.

These regulations were first proposed in 2012 and finalized in 2014, and apply to all passport applications submitted after July 18, 2014.

As part of the increasing efforts of the IRS to expose unreported worldwide income, this is yet another way to ensure tax compliance and to detect the tax invaders. The information the IRS is given by the US Department of State is enough to check the compliance of any passport applicant.

This is in addition to the Foreign Account Tax Compliance Act (FATCA), which was enacted in the United States 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act and was an important development in U.S. efforts to combat tax evasion by Americans holding investments in accounts outside the United States.

Under FATCA, non US foreign financial institutions (banks, hedge funds, pension funds, insurance companies etc.) are required to report to the U.S. tax Authorities (the IRS) information regarding accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest, i.e., 10%. Failure to do so will impose a withholding tax of 30% on most US sourced income payments to the foreign financial institution.

Offshore tax evasion is a serious problem for countries all over the world NOT just in the USA, and all countries have a shared interest in cooperating with each other and sharing information between them.

On October 29, 2014, the finance ministers of approximately 50 countries met in Berlin and signed a Multi-Lateral Competent Authority Agreement which will designate which institution in each country is responsible for transferring tax data to other member states. Under the agreement, information on new accounts and pre-existing individual high-value accounts will be exchanged by the end of September 2017. All other account information will be exchanged by the end of September 2018.

Countries are finding “creative ways” to receive their citizen’s personal information in order to check their tax compliance status. What starts as an innocent request for a passport renewal can lead to a very long and unpleasant correspondence with the IRS regarding your tax issues…