As another season of summer travel starts, Canadian residents with US ties should make sure they are thinking carefully about their tax obligations. Tax compliance may not be first in the minds of most people planning trips to the US, but Congress and the Obama administration certainly are thinking about the combination of travel and taxation. If a proposed law is enacted, US passport holders with tax debt or without a valid Social Security number could, as soon as 2016, find themselves losing that passport and maybe even being forced to remain in the US until the issues are resolved.
On May 14, 2015, the US Senate passed a trade bill that contains a provision from Senator Orrin Hatch allowing the State Department to revoke the passports of US citizens who owe more than $50,000 in unpaid taxes, or who do not have a valid Social Security number (SSN).1 Hatch's addition to the bill, if passed by the House and signed by the president, would give the State Department authority to revoke passports not associated with valid SSNs—even, presumably, unannounced at the border. Unfortunately, the solution to this problem for affected US passport holders may not be simple since obtaining an SSN can prove especially tricky for Americans who live outside the US.
The US Senate passed Bill 1269 with broad bipartisan support: 78 senators voted in favor, while only 20 voted against it and two abstained.2 Although the Senate has approved similar bills in the past and seen them later die in the House,3 this iteration has significant support in both Democratic and Republican camps and in multiple branches of government. Perhaps most strikingly, the 2015 version includes a new section that allows the State Department to deny a passport application that does not include a valid SSN or to revoke the passports of US citizens whose passport applications did not include such a number.4
The link between passport denial and revocation is fairly apparent, and implementation of such a measure would continue the US's unique willingness to employ sometimes aggressive means of compelling compliance with its citizenship-based taxation. The Foreign Account Tax Compliance Act (FATCA), in effect as of July 2014, is the centerpiece of a new US regime designed to ensure that US citizens abroad with US assets fulfill their annual tax filing obligations. Unfortunately, FATCA hits US citizens living abroad especially hard.
The passport denial and revocation provision would add another "stick" to this plan, even if it is not technically part of FATCA. SSNs are required in order for US citizens to file their tax returns5, so making an SSN a requirement to hold a US passport gets non-filers into the IRS system. No other country has an offshore tax compliance law as stringent as FATCA, and it appears that no nation in North America or Western Europe has a passport revocation and denial program tied directly to a failure to pay taxes or file returns.6
If the US does become a pioneer in this area, it is possible that implementation could happen relatively quickly since the groundwork for a more robust interface between the IRS and other parts of the federal government is already in place. The US Government Accountability Office, for instance, analyzed passport denials and restrictions as a tool for tax collection in 2011 and identified the lack of enabling legislation as perhaps the biggest impediment to its implementation.7 Congress has already enacted a penalty structure for Americans who do not provide an SSN with their passport application8 and the IRS is updating its procedures for tracking such individuals.9
Moodys Gartner has previously commented on the possible impact of similar legislation, and noted that it could be felt acutely by Americans living abroad because of complications created by the requirement that US citizens use only US passports for travel to and from the US. Under current law, people who hold a US passport but who enter or depart the US without a US passport do so illegally.10 While in practice US Customs and Border Patrol may not always police violations of this law, its language is fairly unambiguous: "Except as otherwise provided by the President and subject to such limitations and exceptions as the President may authorize and prescribe, it shall be unlawful for any citizen of the United States to depart from or enter, or attempt to depart from or enter, the United States unless he bears a valid United States passport."11 This is particularly important for Canadian residents, not only because many travel frequently across the longest undefended border in the world to the US, but because of the large number of US citizens resident in Canada.
Estimates of the number of expatriate Americans worldwide and in Canada vary, though the worldwide numbers are often cited at about 7 million and the Canadian numbers range between 260,000 and 1 million.12 Many of these individuals do not know that they are considered US citizens by virtue of being born in the US, having an American parent, or not having relinquished US citizenship under current US definitions. Others are simply unaware that US citizens must file tax returns every year they have income, regardless of where they live.
It is not difficult to imagine a situation where a US passport holder resident in Canada—perhaps a dual citizen, or an American married to a Canadian—does not know that as a condition of keeping the US passport, he or she must file US tax returns every year even if no actual US tax has to be paid. As written, Hatch's proposal may not mean that Americans who have not filed taxes will show up to the border to be surprised that their passports are being confiscated. The bill allows passport revocation in the case of "seriously delinquent tax debt," a term it defines to mean "outstanding debt [. . .] for which a notice of lien has been filed in public records pursuant to [Internal Revenue Code] section 6323 or a notice of levy has been filed pursuant to [IRC] section 6331."13 In brief, this means a U.S. citizen would not lose his or her passport without first having notice of the tax debt. But importantly, this is not the case with the SSN requirement as it is written.
Americans living outside the US might question the wisdom of revoking passports for unpaid taxes or not having an SSN. The proposed law may also pose constitutional issues related to the right to travel and due process. Those are debates for another article, though it is worth mentioning that the US constitutional "right to travel" standard is not always clear-cut and that the right to international travel is adjudicated under a different standard from that which governs the right to travel within the US.14 Indeed, even in the case of domestic travel, the US Supreme Court has declined to identify the specific authority that creates "the right to go from one place to another," in one case citing the Articles of Confederation (replaced by the US Constitution) and remarking that this right "may simply have been 'conceived from the beginning to be a necessary concomitant of the stronger Union the Constitution created.'"15
For dual citizens of the US and Canada, the Canadian Charter of Rights and Freedoms may provide more direct protection of a right to international travel. Charter Sec. 6 states that "Every citizen of Canada has the right to enter, remain in and leave Canada."16 Yet it is unclear what Canada could or would do if the US seized the US passport of a dual citizen, and thereby prevented him or her from legally leaving the US until an SSN was obtained or taxes paid.17 Even if Canada would admit a dual citizen carrying only a Canadian passport, one must keep in mind that the US also cooperates with INTERPOL in using a list of revoked passports used by customs officials in multiple countries.18 Conceivably, a revoked US passport could impede travel out of the US regardless of Canada's position on the issue.
In the nearer term, perhaps the most pressing inquiry is whether the State Department would interpret the law (and US Customs and Border Protection would enforce it) to seize passports not associated with valid SSNs. The answer may be anyone's guess, but comments by the US Justice Department19 and reports by the Treasury Department20 make plain that stepped-up enforcement of laws against offshore tax noncompliance by US citizens are a priority for the current administration. Despite the fact that many Americans who live outside the US may find these policies unfair, the recent example of London mayor, rumored prime minister candidate, and dual UK – US citizen Boris Johnson—who initially said he would refuse to pay US taxes before capitulating21—it is difficult to argue that the US is not so far succeeding in its offshore enforcement priorities.
Likewise, it seems very likely that the proposed law would at minimum make the process for obtaining an SSN outside the US more difficult than it already is. US citizens born outside the US do not have US birth certificates, which is one of the documents the State Department will accept as proof of US citizenship. If not registered as US citizens born abroad by their parents, these individuals will need to show a US. passport in order to prove US identity to apply for an SSN. However, under the proposal a passport will require an SSN, thus creating a catch-22 until the various agencies work out their differences.
Some commentators question whether the larger trade bill, into which Hatch tucked the tax delinquency and SSN provisions, will survive in the House.22 They may be right. But it is also certainly possible that the provision could find its way into a compromise trade bill, or another law covering only passports and customs. Anything that can garner support from senators from as far across the aisle from each other as Harry Reid and Mitch McConnell has at least the potential for enough common ground between House Democrats and Republicans to make it to the Oval Office for the president's signature. Speaker of the House John Boehner was described as "expressing optimism" about the Senate's proposed law and President Obama has already indicated his support for the bill in its current state.23 The fact that the provision has also been separated from some parts of the more contentious trade debate likewise might translate into a stronger chance at survival.24
Is it possible, then, that as early as next year, Canadian residents with US passports but no valid Social Security numbers could have those passports confiscated when they travel to the US? Time of course will tell, but as of now it looks like the answer could actually turn out to be yes.
1 Senate Bill 1269 Sec. 7345(e).
2 Senate Roll Call, May 14, 2015, http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=114&session=1&vote=00179.
3 2012 H.R. 4348, as amended in the Senate by MAP-21; Highways Act of 2014 (June 2014 version).
4 S. 1269 Sec. 7345(e).
5 Internal Revenue Code § 6109.
6 Canada, for example, does not have any provisions related to passports and tax noncompliance, though (like the US) it will deny a passport application or revoke a passport for non-payment of child support. See http://www.justice.gc.ca/eng/fl-df/enforce-execution/pwo-pqp.html, http://www.ppt.gc.ca/protection/revocation.aspx?lang=eng, http://www.acf.hhs.gov/programs/css/resource/overview-of-the-passport-denial-program.
7 US Government Accountability Office, Report to Congressional Requesters: Federal Tax Collection – Potential for Using Passport Issuance to Increase Collection of Unpaid Taxes, GAO-110272, March 2011, available at http://www.gao.gov/new.items/d11272.pdf.
8 IRC § 6039E.
9 See Comment Request for Form 13997, 80 Federal Register 25360, 4 May 2015, https://www.federalregister.gov/articles/2015/05/04/2015-10321/proposed-collection-comment-request-for-form-13997.
10 8 U.S.C. 1185(b).
12 US National Taxpayer Advocate 2011 Annual Report to Congress, at 129; Statistics Canada 2011 National Housing Survey, http://www12.statcan.ca/nhs-enm/2011/dp-pd/prof/details/page.cfm?Lang=E&Geo1=PR&Code1=01&Data=Count&SearchText=Canada&SearchType=Begins&SearchPR=01&A1=All&B1=All&Custom=&TABID=1; Lauren Krugel, "Attention American Expats in Canada: The IRS is Eyeing You," The Globe and Mail, 13 July 2014, http://www.theglobeandmail.com/globe-investor/personal-finance/taxes/attention-american-expats-in-canada-the-irs-has-its-eyes-on-you/article19140900.
13 S. 1269 Sec. 7345(b).
14 See Zemel v. Rusk, 381 US 1, 15 (1965) (distinguishing between travel within the US and travel outside the US, and concluding that "the Constitution does not require [the State Department] to validate passports" in certain circumstances.
15 Saenz v. Roe, 526 US 489, 500-501 (1999) (in part quoting United States v. Guest, 383 US 745, 758 (1966)).
16 Constitution Act, 1982, available at http://laws-lois.justice.gc.ca/eng/const/page-15.html.
17 Senate Bill 1269 itself does not explain how a revoked passport can be reissued, so presumably the requirements and process would have to be established through regulations and would involve rectifying the missing SSN or unpaid taxes.
18 "Written Testimony of PLCY Office of International Affairs Assistant Secretary and Chief Diplomatic Officer Alan Bersin and CBP Office of Field Operations Acting Deputy Assistant Commissioner John Wagner for a House Committee on Homeland Security, Subcommittee on Border and Maritime Security Hearing Titled "Passport Fraud: An International Vulnerability," U. Dept. of Homeland Security, April 2014, http://www.dhs.gov/news/2014/04/04/written-testimony-plcy-office-international-affairs-and-cbp-office-field-operations.
19 See, e.g., Ajay Gupta, "Offshore Enforcement to Remain Top US Priority in 2015," Tax Analysts Worldwide Tax Daily, Dec. 15, 2014 (quoting U.S. Justice Department Tax Division attorneys on offshore compliance enforcement).
20 US Treasury Inspector General for Tax Administration, "The Internal Revenue Service Needs to Enhance Its International Collection Efforts," Government Accountability Office International Collection, Ref. No. 2014-30-054, Sept. 12, 2014.
21 George Parker and Vanessa Houlder, "London Mayor Bows to 'Outrageous' Demand to Pay US Tax Bill," Financial Times, 21 Jan. 2015, http://www.ft.com/cms/s/0/149b859c-a15b-11e4-bd03-00144feab7de.html#axzz3adQHlg7M.
22 See, e.g., Jordain Carney and Alexander Bolton, "Senate Approves Trade Enforcement Measure, Clearing Way for Fast Track," The Hill, http://thehill.com/policy/finance/242076-senate-approves-trade-enforcement-measure.
23 Siobhan Hughes and William Mauldin, "Senate Deal Gives Trade Bill New Life," Wall Street Journal, 13 May 2015, http://www.wsj.com/articles/senate-leaders-reach-new-deal-on-fast-track-vote-1431544128.
24 Id. Also compare the much closer 62-38 vote on another, more contentious trade bill with which the passport measure was originally paired, discussed in William Mauldin and Kristina Peterson, "Fast-Track Trade Bill Survives Key Senate Vote," Wall Street Journal 21 May 2015, http://www.wsj.com/articles/fast-track-trade-bill-survives-key-senate-vote-1432220409.
Moodys Gartner Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients' special circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.