New passport curbs among IRS tools for enforcement

President Donald Trump has promised to cut individual income tax rates and simplify the filing process. But that doesn’t mean Americans should take their tax-reporting obligations any less seriously than before. It’s still business as usual in terms of enforcement at the Internal Revenue Service.

In fact, it’s getting tougher in some respects:

Travel restrictions coming

Citizens of certain Muslim-majority nations aren’t the only people who need to beware U.S. travel restrictions. Americans with seriously delinquent tax bills also are at risk of having their wings clipped.

Owing to legislation passed in 2015, the IRS will start sharing information with the State Department, which could revoke or deny issuing new passports to people with high federal tax debts. This delinquent-taxpayer “certification” process will begin in early 2017.

“Upon receiving certification, the State Department may revoke your passport,” the IRS warned in an update.

Seriously delinquent tax debts that could trigger passport restrictions are legally enforceable sums exceeding $50,000, including interest and penalties, for which a federal tax lien has been filed or a levy has been issued.

Not everyone owing money to the IRS need worry, such as those paying debts in a timely manner under an installment agreement. Before denying a passport, the State Department will give delinquent taxpayers 90 days to resolve erroneous certification situations, make full payment of federal tax debts or enter into a payment arrangement with the IRS.

Nigel Green, CEO of investment-advisory firm deVere Group, warned that the new rules could especially affect Americans living abroad, for two key reasons. First, these people tend to use their passports more often, including as a form of identification in foreign nations. Second, tax returns have become more complex for expatriates due to additional reporting requirements that often result in filing errors.

“In our experience of working with U.S. citizens who live abroad, 35 percent are now likely to make a mistake on their tax return and/or file late due to the new complexities,” Green said in a commentary. “For U.S. citizens who are residents overseas, the IRS’ latest weapon to collect taxes means it is more important than ever to stay on top of your taxes and file on time, and correctly.”

Frivolous returns are no joke

One of the behaviors that can land taxpayers in hot water is filing a frivolous return. The IRS apparently doesn’t report the numbers of frivolous returns — two agency spokespeople asked about this topic said they didn’t have statistics to share. But frivolous returns appear frequently enough that the agency continues to include this among its list of “dirty dozen” scams.

Frivolous returns are those that don’t include enough information to figure the correct tax or contain information clearly showing that the tax reported is substantially incorrect. A $5,000 penalty could apply on frivolous returns, plus the amount of taxes owed, other penalties and even criminal prosecution.

Taxpayers might cite any of several reasons for filing frivolous returns, from mistakenly believing that filing is a voluntary option to assuming incorrectly the IRS will complete returns for people who don’t file. The IRS said it’s concerned that some taxpayers might be the victims of promoters or con artists who peddle various tax-avoidance schemes and then leave clients to fend for themselves when the IRS begins an audit or prosecution.

Other bad behaviors on the IRS’ list of “dirty dozen” scams include deliberate acts to falsify income to qualify for the Earned Income Tax Credit, as well as various abusive tax shelters such as those that use foreign trusts or limited liability companies. Another involves tax-return preparers who promote inflated-refund claims tied to fictitious Social Security benefits, false education credits and so on.

Higher audit rates for some

While the IRS is auditing a lower proportion of taxpayers overall — the rate has declined to 0.8 percent in 2015 from 1.1 percent in 2011 — some taxpayers face a greater chance of attracting scrutiny. The wealthiest taxpayers are an obvious example. Audit rates for people with $1 million or more in income jumped to 9.6 percent in 2015 from 7.5 percent in 2014, according to Wolters Kluwer Tax & Accounting, publisher of CCH tax guides.

But even some individuals with much lower income could get checked out, especially self-employed people reporting their tax details on Schedule C. The audit rate climbed to 2.4 percent in 2015 from 1.9 percent in 2014 for Schedule C filers with income between $25,000 and $100,000, and it inched higher to 2.5 percent from 2.4percent for those in the $100,000-$200,000 income range.

Common problems that can trigger IRS scrutiny include math errors, missing information (such as Social Security numbers) and other errors that run contrary to tax law, such as trying to deduct a loss from the sale of an owner-occupied home.