More than 224,000 people who received passports in 2008 owed a total of over $5.8 billion in federal income taxes, but Congress would need to change the laws to enable the State Department to coordinate with the IRS on denying them passports, according to a new government report.
The report, by the Government Accountability Office, noted that federal law currently prohibits the IRS from divulging taxpayer information, including unpaid federal taxes, to the State Department, unless the taxpayer consents. In contrast, federal law permits certain restrictions on the issuance of passports to individuals, such as individuals owing child support debts over $2,500 or with outstanding felony warrants.
The 224,000 tax delinquents who received the passports represented about 1 percent of the 16 million individuals who received passports in 2008. However, the estimated amount of unpaid federal taxes is probably understated because it excludes individuals who have not filed tax returns or underreported income.
“It’s disturbing to see jet-setting gamblers and Ponzi schemers getting U.S. passports when they owe millions of dollars in taxes," said Sen. Charles Grassley, R-Iowa, who was one of the senators who requested the GAO study. "At the same time, there’s a longstanding precedent of taxpayer privacy and freedom to travel that Congress would need to study carefully before changing. Getting a U.S. passport is a privilege but tax privacy has to be protected because tax information has been abused in the past.”
According to State Department officials, the department cannot compel a passport applicant to provide a Social Security number. As a result, the State Department’s records sometimes did not contain a valid SSN, which is necessary to match passport data to IRS data. In addition, the number of passport holders and dollars owed only includes one year of passports that were issued, substantially understating the total tax debt for all passport holders.
The GAO selected a sample of 25 passport recipients to investigate for abuse related to the federal tax system or criminal activity. Of these cases, at least 10 passport recipients had been indicted or convicted of federal laws. In addition, the IRS assessed trust fund recovery penalties on several passport recipients when the individual did not remit payroll taxes to the federal government. Rather than fulfill their role as trustees of this money and forward it to the IRS, they diverted the money for other purposes. Some of the individuals accumulated substantial wealth and assets, including million-dollar houses and luxury vehicles, while failing to pay their federal taxes. At least 16 passport recipients traveled outside the country while owing federal taxes. At least four passport recipients resided in another country at the time of the GAO’s investigation.
Two individuals used the identities of deceased individuals to fraudulently obtain passports and then used these passports to travel to Mexico, France and Africa. In one case, the unpaid tax debt belonged to a deceased individual, and in the other case, the debt was incurred by the imposter. The GAO referred the two cases to the IRS for further investigation.
“Our tax reform effort gives us the opportunity to improve tax compliance – a goal we absolutely must meet,” said Senate Finance Committee Chairman Max Baucus, D-Mont. “People who don’t pay the taxes they owe put a significant strain on programs we count on like Medicare and Social Security, so every proposal to improve tax compliance deserves evaluation. Taxpayers have a right to privacy, and that’s something we need to protect, so we need to carefully weigh each idea of how to improve tax compliance. Tax evasion added $330 billion to the deficit in the last fiscal year alone, so I’ll certainly look closely at this and other ideas to ensure everyone pays their fair share.”
The GAO recommended that if Congress is interested in pursuing a policy of linking federal tax debt collection to passport issuance, it may consider taking steps to enable the State Department to screen and prevent individuals who owe federal taxes from receiving passports. This could include asking the State Department and the IRS to jointly study policy and practical issues, and develop options with the appropriate criteria and privacy safeguards.
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