From Individual Taxes

Passport with Map

The Law That Could Put Millions of Americans’ Passports In Jeopardy

Written on January 20, 2016 by Natalie Boatner

Americans living abroad have a new cause for worry when they file their 2015 tax returns: making a mistake could cost them their passports. For over eight million Americans living abroad, compliance with the Foreign Account Tax Compliance Act (FATCA) has created headaches since 2010. Now a piece of new legislation called the Fixing America’s Surface Transportation, or FAST, act has many Americans contemplating relinquishing their U.S. citizenship for fear of financial or criminal penalties imposed by the IRS.

Critics have long argues that FATCA’s reporting requirements are unrealistically complex and disadvantage Americans abroad. FATCA targets non-compliance by American taxpayers abroad but it relies mainly on individual reporting by taxpayers and on reporting by foreign financial institutions regarding taxpayers’ holdings.

The FAST act increases the potential penalties for expats who fail to comply with FATCA. The long document has two important provisions buried inside its tax code. These two provisions mean that the IRS can now impact the denial, renewal, or attaining of a U.S. passport.

The first passport provision gives the U.S. Secretary of State the power to revoke or deny the application for or renewal of a passport if the IRS identifies the taxpayer as seriously delinquent. The second provision gives the same power to the Secretary of State if the applicant fails to provide a valid, correct social security number. If a passport was issued, it can be revoked if the invalid or incorrect social security number was provided willfully, recklessly, or negligently.

The problem lies in the definitions of the terms “seriously delinquent,” and “recklessly, or negligently.” Under the provisions, seriously delinquent means any outstanding federal tax debt exceeding $50,000. This includes interest and penalties, and is actually fairly easy to achieve among American expats. Recklessly and negligently are under the discretion of the IRS and State Department to define on a case-by-case basis.

For American expats and foreign nationals abroad already struggling with international taxes under FATCA, FAST is likely going to make things more complicated. It is of the utmost importance to fill out your passport paperwork carefully, as even minor errors can rack up major travel, lodging, lawyer, and visa fees. Even more helpful would be to employ a tax lawyer or an accountant. The most important thing to do is stay informed. The FAST Act can be read in full here.

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What Gene Bicknell’s Battle With Kansas Says About State Residency Laws

 

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It is not unheard of for tax disputes to stretch longer than a decade, especially when millions are at stake. It looks like this may be the case for Gene Bicknell and the state of Kansas.

The saga of the tax dispute between Bicknell, the man who made millions from Pizza Hut franchises, and the Kansas Department of Revenue continues with the recent decision from the Kansas Court of Appeals.

The value concerned isn’t negligible: $42 million paid by Bicknell to Kansas in 2013. If Kansas has to return the money, it could push the state budget into the red, says the Associated Press. Whether Kansas gets to keep the $42 million boils down to whether Bicknell was a resident of Kansas or Florida during 2005 and 2006.

In 2005, Bicknell changed his residency from Kansas to Florida. The following year he sold his interest in NPC International to Merrill Lynch Global Private Equity. At the time of the sale NPC International was the largest Pizza Hut franchisee in the United States. As a resident of Florida, which doesn’t have a state income tax, Bicknell sidestepped the expensive state taxes that would have resulted from selling his stake in NPC International.

As Bloomberg BNA’s Genie Nguyen has pointed out, moving to a state with no state income tax is a well-known strategy for avoiding state income taxes. However, establishing residency in a new state isn’t always that simple. In most states, including Kansas, residency is determined by an individual’s domicile. An individual can only have one domicile and where it is depends on a wide variety of factors including, but not limited to, physical presence.

Part of the legal tangle is due to the changes made after 2005 regarding how the Kansas Department of Revenue defined domicile. In 2005, as Peter J. Reilly highlights in Forbes, the DOR’s brief regulation on domicile implies that it is simply a matter of the location of an individual’s driver’s license, voter registration, and vehicle registration.

New regulations after 2005 added on a slew of other factors to consider, including:

  • how much time the individual physically spent in Kansas
  • how much time the individual physically spent in other jurisdictions
  • the individual’s previous domicile
  • property ownership
  • the physical location of the individual’s vehicle
  • where the individual receives physical mail
  • other facts “relevant to the determination of that person’s domicile”

 

In 2010, the Kansas Department of Revenue used the updated regulations to assess Bicknell with more than $42 million from the sale of his interest in NPC International in 2006. Bicknell’s roots in Kansas went deep (he was even a former candidate for governor) and consideration of the new criteria might well have questioned his Florida residency. Bicknell appealed, but three years later the Kansas Court of Tax Appeals (COTA) ruled in favor of the Department of Revenue.

Bicknell paid the $42 million but appealed once again, arguing that COTA disregarded several of the Department of Revenue’s regulations regarding residency status, as well as that those standards were “unconstitutionally vague.” This time, Bicknell may have a more favorable result. In September of 2015, the Kansas Court of Appeals vacated the previous COTA ruling. COTA will now have to reconsider the case.

The Court of Appeals declined to address Bicknell’s constitutional appeal. Whether or not the vague nature of Kansas Department of Revenue’s standards for residency is unconstitutional, it is undeniable that the lack of clarity leads to confusion and expensive court costs. Residency standards vary from state to state and are constantly changing. As Bicknell’s example shows, being caught on the wrong side of those changes can be a costly mistake.