Federal Tax Collection: Potential for Using Passport Issuance to Increase Collection of Unpaid Taxes
Released: 2011-04-11T00:00:00

Letter

Background

Individuals with Unpaid Taxes Are Not Prohibited from Receiving Passports

Federal law does not authorize State to deny the issuance of passports to individuals who owe federal taxes. Federal law permits the Secretary of State to deny or revoke the issuance of passports only in certain circumstances, including, but not limited to, when the individual is subject to a criminal court order, condition of probation, or condition of parole, any of which forbids departure from the United States and the violation of which could result in the issuance of a federal warrant of arrest, including a warrant issued under the Federal Fugitive Felon Act; is over $2,500 delinquent in child support; is delinquent in certain Department of State debts; has an outstanding felony warrant; has an outstanding foreign felony warrant; is subject to an extradition request that has been presented to a foreign country; has been declared legally incompetent; used a passport or crossed an international border to commit an act based on which the individual was subsequently convicted of certain drug trafficking crimes, but only during the period the individual is imprisoned or on parole or supervised release; or used a passport or crossed an international border to commit an act based on which the individual was subsequently convicted under the federal “sex tourism” statute, but only during the period the individual is imprisoned or on parole or supervised release.

Federal Law Prevents Disclosure of Taxpayer Information

The protection of taxpayer information is commonly thought to be critical to voluntary compliance with the tax code and necessary to protect taxpayer privacy. Under current law, taxpayer information is protected under 26 U.S.C. § 6103, among other provisions. IRS must keep taxpayer information confidential and may only disclose it under limited circumstances, e.g., for federal or state tax administration, to assist in the enforcement of child support programs, and to verify eligibility for public assistance programs, unless the taxpayer consents to such disclosure. Individuals or agencies receiving taxpayer data must, as a condition of receiving such data, have safeguards for the protection of, and for accounting for, the use of such data.

Magnitude of Unpaid Taxes Owed by Individuals Issued a Passport

The State Department issued passports to over 224,000 individuals who owed over $5.8 billion in known unpaid federal taxes as of September 30, 2008. This represented over 1 percent of the approximately 16 million individuals issued a passport during fiscal year 2008. Currently, federal law does not authorize State to deny the issuance of passports to individuals who owe federal taxes. Because IRS’s database does not include amounts owed by taxpayers who have not filed tax returns and for which IRS has not assessed tax amounts due, the estimated amount of unpaid federal taxes is likely understated. Also, the figures cited within this report only represent passports issued for 1 fiscal year. As such, our estimate likely understates the total amount of unpaid taxes by all passport holders. According to State, there are tens of millions of passport holders, thus the number of passport holders with unpaid federal taxes and the magnitude of unpaid federal taxes owed by passport holders are likely to be substantially higher than the figures cited in this report.

Tax Characteristics of Individuals Issued a Passport

As shown in figure 1, about 90 percent of the approximately $5.8 billion in unpaid taxes comprised individual income taxes. The other 10 percent of taxes were taxes owed from “trust fund recovery penalties.” In these situations, IRS found that individuals within the business (e.g., corporate officers) were personally liable for the payroll taxes withheld from employees’ paychecks but not forwarded and assessed a civil monetary penalty for those withheld amounts.

A substantial amount of the unpaid federal taxes shown in IRS records as owed by individuals issued a passport in fiscal year 2008 had been outstanding for several years. As reflected in figure 2, about 41 percent of the $5.8 billion in unpaid taxes was assessed within the last 3 years. Our previous work has shown that as unpaid taxes age, the likelihood of collecting all or a portion of the amounts owed decreases. This is, in part, because of the continued accrual of interest and penalties on the outstanding tax debt, which, over time, can dwarf the original tax obligation. The amount of unpaid federal taxes reported above does not include all tax debts owed by individuals issued a passport in fiscal year 2008 because of statutory provisions that give IRS a finite period under which it can seek to collect unpaid taxes. Generally, there is a 10-year statutory collection period beyond which IRS is prohibited from attempting to collect tax debt. Consequently, if the individuals issued a passport owe federal taxes beyond the 10-year statutory collection period, the older tax debt may have been removed from IRS’s records. We were unable to determine the amount of tax debt that had been removed.

Further, for many of these debts, IRS is attempting to collect using the Federal Payment Levy Program (FPLP). FPLP is a levy program where the Department of the Treasury collects delinquent tax debt by continuously levying (offsetting) up to 15 percent of certain federal payments (e.g., federal salary payments and certain Social Security Administration payments) made to tax debtors. IRS typically sends the tax debts to FPLP except in cases where (1) IRS has not completed its notification process; (2) tax debtors have filed for bankruptcy protection or other litigation; (3) tax debtors have agreed to pay their tax debt through monthly installment payments or have requested to pay less than the full amount owed through an offer in compromise; (4) IRS determined that the tax debtors are in financial hardship; (5) tax debtors are filing an amended return; and (6) IRS determined that specific circumstances (e.g., criminal investigation) exist that warrant special exclusion from FPLP.

Our analysis of Treasury data found that about 42,500 of the approximately 224,000 passport recipients were sent to Treasury for continuous levy. The dollar amount of these debts was about $1.3 billion.

Unpaid Federal Taxes of Individuals Issued a Passport Are Substantially Understated

Although the over $5.8 billion in unpaid federal taxes owed by individuals issued a passport as of September 30, 2008, is a significant amount, it likely substantially understates the full extent of unpaid taxes owed by these or other individuals. The IRS tax database reflected only the amount of unpaid federal taxes reported by the individual on a tax return or assessed by IRS through its various enforcement programs. The IRS database does not reflect amounts owed by businesses and individuals that have not filed tax returns or understated their taxable income and for which IRS has not assessed tax amounts due. For example, during our audit, we identified several instances from our 25 case studies in which individuals issued a passport failed to file tax returns for a particular tax period and IRS had not assessed taxes for these tax periods. Consequently, while these individuals likely had unpaid federal taxes, they were listed in IRS records as having no unpaid taxes for those periods. Further, our analysis did not attempt to account for individuals who purposely underreported income and were not specifically identified by IRS as owing the additional federal taxes.

In addition, although federal law requires passport applicants applying for or renewing a passport to provide their SSN if the applicant has a SSN, having a SSN is not a prerequisite to obtaining a passport. According to State officials, section 7(a)(1) of the Privacy Act prevents State from refusing to issue a passport to an applicant even though the application does not have a SSN. State officials stated that State needs legislation to compel passport applicants to provide a SSN and to withhold passport issuance or deny the application for failure to do so. Therefore, we found that State records did not always contain this key field or contained obviously false numbers, as State instructs applicants who do not have a SSN to enter all zeros into the SSN field of the passport application. The lack of SSNs prevented us from determining whether those passport applicants had unpaid federal taxes and, if so, the amount of unpaid taxes owed by them.

Because our $5.8 billion estimate in unpaid taxes only represents 1 year of passport recipients, the dollar amount of tax debts owed by individuals who hold passports is likely to be substantially higher. State issues millions of passports each year. As such, the amount of tax debt for individuals currently holding U.S. passports may be in multiples of our $5.8 billion estimate for fiscal year 2008. Because passports are typically valid for up to 10 years, many of these individuals will likely owe federal taxes at the time they apply for renewal of their passports.

Examples of Individuals Issued a Passport Involved in Abusive and Potentially Criminal Activity Related to the Federal Tax System

Among the 25 cases involving passport recipients with outstanding tax debt that we audited and investigated, we found abusive or potentially criminal activity related to the federal tax system. These 25 passport recipients either lived outside the United States or resided in California, Florida, Illinois, Nevada, New Jersey, New York, Oregon, Texas, or Washington. Of these cases, we identified several passport recipients for which IRS had assessed trust fund recovery penalties due to these individuals’ willful failure to remit payroll taxes withheld from their employees’ paychecks to the federal government. In these situations, IRS found that several of these individuals were to be held personally liable for the withheld amounts not forwarded and assessed a civil monetary penalty for those withheld amounts. Rather than fulfill their role as “trustees” of this money and forward it to IRS as required by law, these passport recipients diverted the money for other purposes. Our investigations revealed that, despite owing substantial amounts of federal taxes to IRS, some of these 25 passport recipients had substantial personal assets— including multimillion dollar homes and luxury cars. For example, one passport recipient purchased a house for about $2 million and investment property for about $1.5 million while the recipient owed over $1 million in federal taxes. Another passport recipient owned luxury vehicles and gambled millions of dollars while owing about $47 million in taxes. This recipient received multimillion dollars in federal tax refunds to support this lifestyle until IRS discovered the tax debts in a later examination.

Our investigations found that several of these recipients used their passports to travel internationally for business. Two of the case study passport recipients are or had been individuals who worked on State contracts who traveled to Europe, Asia, and the Caribbean performing work for State. These individuals were or are potentially performing sensitive work for the Department of State on behalf of the United States. However, 26 U.S.C. § 6103 precludes IRS from disclosing their names to State, and precludes us from both disclosing their names to State and from contacting State to determine whether these individuals have security clearances. Our investigations also found that two individuals committed identity theft by using the identities of deceased individuals to fraudulently obtain passports. Our investigations found that these individuals used their passports to travel to Mexico, France, and Africa. Issuing passports to “deceased” individuals, in these cases, enabled fraudulent activity of these individuals who traveled internationally using the identity of and impersonating the deceased individual. We referred these two cases to IRS for further investigation. Similar to the State contractors, 26 U.S.C. § 6103 also precludes us from referring these fraud cases to State directly. Our investigations also revealed that at least four passport recipients currently reside in another country while owing federal taxes. For example, we identified one passport recipient who filed no tax returns nor paid any taxes to IRS during the 2000s, who currently lives overseas while working for the World Bank.

During our investigations, we also noted the following: At least 14 passport recipients did not file their annual income tax return for 1 or more years.

For at least 20 passport recipients, IRS had filed federal tax liens against a recipient’s property. IRS included at least 16 of the passport recipients in FPLP for continuous levy.

At least 10 passport recipients had been indicted or convicted of violating federal laws. These include indictments and convictions for controlled substance distribution, making false statements to the government, bank fraud, and money laundering.

One passport recipient lives in a million-dollar house that is owned by the individual’s employer. The employer leases the house to the recipient for thousands of dollars a month.

Table 1 highlights 15 of the 25 cases of individuals owing federal taxes at the time of passport issuance. Appendix II provides details on the other 10 cases we examined. We are referring all 25 cases we examined to IRS for further collection activity and criminal investigation, if warranted.

In December 2010, we met with IRS to discuss the 25 cases that we investigated and audited to obtain an understanding of IRS’s investigative and collection activities performed on each case. Although IRS did not provide detailed investigative and collection activities for each case, IRS officials did broadly discuss certain barriers and limitations in the investigation and collection efforts by the agency for these 25 cases and other individuals and entities that owe taxes. In addition, IRS officials explained the impact 26 U.S.C. § 6103 has on IRS’s ability to share information with State. Specifically, IRS officials stated that they cannot inform Department of State of the two individuals who have worked on State contracts or the two deceased individuals we identified through our investigations without the taxpayers’ consent. IRS officials stated that 26 U.S.C. § 6103 prevents this disclosure of the deceased individuals even though they may pose security risks to the nation based on the fraudulent acquisition of the passport. IRS officials stated that six of the cases were under criminal investigation or are currently under investigation.

In a December 2010 meeting with IRS officials, we also discussed what IRS and State can do to prevent the issuance of passports to these 25 individuals with federal tax delinquencies. As discussed earlier, State currently cannot deny the issuance of passports to individuals who owe federal taxes, although passports can be denied for other reasons. For State to deny passports for this reason, legislation would need to be passed to provide such authorization and to permit IRS to disclose taxpayer information. If such a federal law were enacted, criteria would need to be established in determining when a tax debt meets the passport restriction requirement. In addition, Congress or the executive branch may need to decide if certain individuals should be exempted from this requirement, such as for national security purposes.

To implement such a restriction, the executive branch may want to use the FPLP as the mechanism or as a model to determine whether an individual owes federal taxes for purposes of passport restrictions. Currently, the Department of Defense (DOD) and Centers for Medicare & Medicaid Services (CMS) periodically send their payment information (e.g., DOD federal contracts payment data and Medicare claims data for physician services, respectively) to FPLP to determine whether those payments should be levied for federal taxes. Treasury electronically compares the names and Taxpayer Identification Numbers (TIN) on the payment files to the control names (first four characters of the names) and TINs of the tax debtors. If there is a match and all legal notifications have been made, Treasury notifies DOD and CMS to reduce (or levy) the federal payment to help satisfy the unpaid federal taxes. State could work with IRS and Treasury to develop a similar process to determine if the passports should be issued or not because of federal taxes owed.

IRS officials stated that screening passport applicants for federal tax debts would likely improve tax collections. Such a requirement could serve as an incentive to individuals wishing to obtain passports to comply with their tax obligations, thus reducing the level of tax delinquencies and promoting compliance. IRS officials stated that there may be practical issues that may arise in implementing such a requirement. For example, it will require additional work for IRS to ensure that State adequately safeguards this taxpayer information. State officials indicated that they would like to study any proposed legislation to provide additional authority to deny passports including constitutional, policy, and practical issues that may arise in its application and use.

Conclusion

IRS enforcement of federal tax laws is vital—not only to identify tax offenders—but also to promote broader compliance by giving taxpayers confidence that others are paying their fair share. As federal deficits continue to mount, the federal government has a vital interest in efficiently and effectively collecting the billions of dollars of taxes owed under current law. Federal law already allows the linkage of debt collection with the passport issuance process in certain areas, including for certain outstanding State Department debt and child support enforcement. The question is whether this is a public policy strategy that might have broader application in other areas, such as federal tax debt. If so, legislation would be needed to facilitate screening for outstanding federal tax liability with linkage to the passport issuance process. Such legislation could have the potential to help generate substantial collections of known unpaid federal taxes and increase tax compliance for tens of millions of Americans holding passports. Appropriate criteria and safeguards would need to be developed and applied, such as to ensure individual privacy, minimize undue approval delays, and permit appropriate exemptions. Related programs currently operating can serve as a starting point for such considerations.

Matter for Congressional Consideration

If Congress is interested in pursuing the policy strategy of linking federal tax debt collection to passport issuance as an approach to help reduce the federal deficit and to increase taxpayer compliance with tax laws, it may wish to consider taking steps to enable and require the Secretary of State to screen and prevent individuals who owe federal taxes from receiving passports, to include establishing criteria for specific categories of passport holders and waivers as appropriate. To do this, Congress may wish to ask the Secretary of State and Commissioner of Internal Revenue to jointly study policy and practical issues and develop options for further consideration, including developing appropriate criteria and safeguards.

Agency Comments

We provided a draft of this report to IRS, State, and Department of the Treasury’s Financial Management Service (FMS) for their review and comment. IRS, State, and FMS did not provide written comments. State provided technical comments, which we have incorporated as appropriate.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of the Treasury, Secretary of State, the Commissioner of Internal Revenue, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff members have any questions about this report, please contact me at (202) 512-6722 or kutzg@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report.

Appendix I: Scope and Methodology

To identify the magnitude of unpaid taxes owed by passport recipients, we requested from the Department of State (State) a list of passport recipients for fiscal year 2008. We also obtained and analyzed Internal Revenue Service (IRS) unpaid assessment data as of September 30, 2008. We matched the passport data to IRS unpaid assessment data using the Social Security number (SSN) field. To avoid overestimating the amount owed by passport recipients, we excluded from our analysis tax debts meeting specific criteria to establish a minimum threshold in the amount of tax debt to be considered when determining whether a tax debt is significant. The criteria we used to exclude tax debts are as follows: tax debts that IRS classified as compliance assessments or memo accounts for financial reporting, and tax debts of less than $100.

The criteria above were used to exclude tax debts that might be under dispute or generally duplicative or invalid, and tax debts that were recently incurred. Specifically, compliance assessments or memo accounts were excluded because these taxes have neither been agreed to by the taxpayers nor affirmed by the court, or these taxes could be invalid or duplicative of other taxes already reported. We further excluded tax debts of less than $100 because we considered them to be de minimis amounts for collecting individuals’ debts.

To identify examples of abuse or criminal activity, we selected 25 passport recipients with federal tax debts for detailed audit and investigation. The 25 cases were chosen using a nonrepresentative selection approach based on our judgment, data mining, and a number of other criteria, such as total amount of taxes owed by passport recipients, number of tax years that the passport recipient did not pay all taxes, types of taxes, and location of the tax recipient. While these case studies were among the more egregious and cannot be generalized beyond the cases presented, they serve to illustrate the sizeable amounts of taxes owed by some individuals and the other characteristics of the cases that could extend beyond the tax system, including the use of passports by individuals involved in crimes such as money laundering. We obtained copies of automated tax transcripts and other tax records (for example, revenue officers’ notes and certain individual tax returns) from IRS, and reviewed these records to exclude passport recipients who had recently paid off their unpaid tax balances and considered other factors before reducing our number of case studies to 25. We performed additional searches of criminal, financial, and public records. We updated the tax debt amount as of July 2010 for these 25 cases, to reflect any additional tax assessments, including interest and penalty, or collections that have occurred.

To determine the extent to which State officials are required to consider tax debts or other criminal activities in the processing of passports, we examined federal law and State regulations. We also made inquiries with State officials on whether State specifically considers tax debts or performs background checks before the passport is issued.

Data Reliability Assessment

To determine the reliability of IRS unpaid assessments data, we relied on the work we performed during our annual audits of IRS’s financial statements. While our financial statement audits have identified some data reliability problems associated with the coding of some of the fields in IRS’s tax records, including errors and delays in recording taxpayer information and payments, we determined that the data were sufficiently reliable to address this report’s objectives.

To determine the reliability of the passport data, we interviewed State officials responsible for those databases about the quality of the data. In addition, we performed electronic testing of the passport database and used the IRS tax assessment file to determine the validity of specific data elements used to perform our work. Based on our discussions with agency officials and our own testing, we concluded that the data used for this report were sufficiently reliable for our purposes.

We conducted this forensic audit from October 2009 to March 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We conducted our related investigative work in accordance with standards prescribed by the Council of the Inspectors General on Integrity and Efficiency. Initiation of our audit was delayed significantly because of State’s refusal to comply with our request for the passport recipient database for over a year. We requested access to the database in September 2008 but did not obtain it until October 2009.

Appendix II: Passport Recipients Owe Federal Taxes

This appendix presents summary information on passport recipients who owe federal taxes associated with 10 of our 25 cases. Table 2 shows the remaining 10 cases that we audited and investigated. As with the 15 cases discussed in the body of this report, we also found abuse and potentially criminal activity related to the federal tax system or other federal laws.