Departing aliens and the sailing permit

Rules have exited for nearly a century (since 1921) under IRC Sec. 6851(d) providing that all resident aliens and certain nonresident aliens must obtain a “Certificate of Compliance” before leaving the United States. In practice this is rarely done, but new IRC Sec 7345 may put a wrinkle in that!  IRC Sec 7345 requires the transfer of taxpayer information between the IRS and the State Department, whereas the sailing permit rules would require the Department of Homeland Security or the State Department to provide information to the IRS for enforcement.

Sec. 6851(d) indicates that no alien, subject to exceptions by regulations, “shall depart from the United States unless he first procures from the Secretary a certificate that he has complied with all the obligations imposed upon him by the income tax laws.” The rules of Sec. 6851(d) were initially codified as Section 250(g) of the Revenue Act of 1921 and were enacted to thwart departing aliens from leaving the country with outstanding income tax liabilities. The Code section laid the groundwork for what is commonly known as a “sailing permit” or “departure permit.”

With the enactment of Sec. 7345, some taxpayers may be contemplating the horror of being detained in an airport security line when attempting to use their passport for foreign travel. The IRS has indicated that it will not be issuing proposed regulations on this new law and will begin enforcement upon issuance of a notice. Practitioners must wait and see how the IRS proceeds in this area, but one wonders if this new law will “fall through the cracks” similar to the sailing permit rules that have existed for nearly a century. Sec. 7345 requires the transfer of taxpayer information between the IRS and the State Department, whereas the sailing permit rules would require the Department of Homeland Security or the State Department to provide information to the IRS for enforcement.

Even with a specific Code section promulgating this rule, along with Internal Revenue Manual Section 21.3.4.18 providing that all resident aliens and certain nonresident aliens must obtain a “Certificate of Compliance” before leaving the United States, in practice this is rarely done. Attorney Virginia La Torre Jeker has written:

[R]esearch indicates that the IRS does not monitor or actively enforce compliance with this statutory requirement even though departing foreign nationals can owe significant tax dollars to the US government for services they have performed while in the US. [“Can the ‘Sailing Permit’ Become the Next FBAR? Bringing Home the Money.”]

The website titled “immihelp“  suggests in its section detailing the requirements for a departing U.S. immigrant that “[n]o one is being asked for a sailing permit for the last several years.”

The passport revocation rule was implemented as a mechanism to aid the IRS in collecting past due tax. As noted, the sailing permit rule was also implemented to collect tax from taxpayers who had avoided filing tax returns and paying tax. On the surface, both seem to be worthy methods to aid the IRS in tax collections, but it is uncertain how the IRS will use the new passport rules. With regard to the sailing permit rules, it is important to understand the compliance requirements should the IRS begin using the sailing permit to aid its collection efforts.

IRS Publication 519, U.S. Tax Guide for Aliens, includes Chapter 11, “Departing Aliens and the Sailing or Departure Permit.” As discussed in Chapter 11 of the publication and the IRS website, before a resident or nonresident alien leaves the United States, he or she must obtain a certificate of compliance. This certificate, known as a sailing permit or departure permit, is issued by the IRS after the individual files a properly completed Form 1040-C, U.S. Departing Alien Income Tax Return, or Form 2063, U.S. Departing Alien Income Tax Statement and Annual Certificate of Compliance.

Who is not required to obtain a sailing permit?

Some aliens are not required to obtain a sailing permit before leaving the United States. If an alien is not required to obtain the permit, that individual will need to have proper identification to support that claim. The following categories of aliens do not need a sailing permit:

• A representative of a foreign government who holds a diplomatic passport; a member of the representative’s household; a servant who accompanies the representative; an employee of an international organization or foreign government whose pay for official services is exempt from U.S. taxes and who has no other U.S.-source income; or a member of the employee’s household who was not paid by U.S. sources. However, if the individual signed a waiver of nonimmigrants’ privileges as a condition of holding both his or her job and his or her status as an immigrant, this exception does not apply, and the individual must obtain a certificate.
• A student, industrial trainee, or exchange visitor, or the spouse or child of such an individual. To qualify for this exception, the individual must have an F-1, F-2, H-3, H-4, J-1, J-2, Q-1, Q-2, or Q-3 visa. Additionally, the individual must not have received any income from sources in the United States other than:

• Allowances covering expenses incident to study or training in the United States (including expenses for travel, maintenance, and tuition);
• The value of any services or accommodations furnished incident to such study or training;
• Income from employment authorized under U.S. immigration laws; or
• Interest on deposits, but only if that interest is not effectively connected with a U.S. trade or business.

• A student, or the spouse or child of a student, with an M-1 or M-2 visa. To qualify, the individual must not have received any income from sources in the United States other than:

• Income from employment authorized under U.S. immigration laws; or
• Interest on deposits, but only if that interest is not effectively connected with a U.S. trade or business.

• If any of the following applies:

• The individual is on a pleasure trip and has a B-2 visa;
• The individual is on a business trip, has a B-1 visa or a combined B-1/B-2 visa, or is present in the United States under visa waiver and does not stay in the United States or any of its possessions for more than 90 days during the tax year;
• The individual is passing through the United States or any of its possessions, including travel on a C-1 visa or under a contract, such as a bond agreement, between a transportation line and the U.S. attorney general;
• The individual is admitted on a border-crossing identification card;
• The individual does not need to carry passports, visas, or border-crossing identification cards because he or she is (1) visiting for pleasure or (2) visiting for business and does not stay in the United States or any of its possessions for more than 90 days during the tax year;
• The individual is a resident of Canada or Mexico who commutes frequently to the United States to work and his or her wages are subject to income tax withholding; or
• The individual is a military trainee admitted for instruction under the Department of Defense, and he or she will leave the United States on official military travel orders.

The exception to the sailing permit does not apply to an individual in the last category if the area director believes the individual had taxable income during the tax year, up through his or her departure date, or during the preceding tax year and that his or her leaving the United States would hinder collecting the tax.

How to obtain a sailing permit

If an alien does not fall under one of the categories listed above, the IRS recommends obtaining a sailing permit at least two weeks before planning to leave. However, the alien cannot apply any earlier than 30 days prior to his or her departure date. To get a permit, Form 1040-C or Form 2063 (whichever applies) must be filed first with the local IRS office. Any tax due from prior tax years must be paid along with any amount shown as due on Form 1040-C. The IRS advises aliens who have been working in the United States to go to a local IRS office in the area of their employment to apply, but applicants may also go to an IRS office in the area of their departure.

Before leaving to go to an IRS office, applicants should gather documents related to their stay and income in the United States to help speed up the process of obtaining a sailing permit. The following is a list of documents that applicants should bring to their local IRS office:

• Passport and alien registration card or visa.
• Copies of U.S. income tax returns filed for the past two years. If the individual was in the United States for less than two years, he or she should bring the income tax returns filed for that period.
• Receipts for income taxes paid on these returns.
• Receipts, bank records, canceled checks, and other documents that prove deductions, business expenses, and dependents claimed on the individual’s tax returns.
• A statement from each employer showing wages paid and tax withheld from Jan. 1 of the current year to the date of departure if the individual was an employee. If the individual was self-employed, he must bring a statement of income and expenses up to the planned date of departure.
• Proof of estimated tax payments for the past year and current year.
• Documents showing any gain or loss from the sale of personal property, including capital assets and merchandise.
• Documents relating to scholarship or fellowship grants including verification of the grantor, source, and purpose of the grant.
• Documents indicating the individual qualifies for any special tax treaty benefits claimed.
• Document verifying the individual’s date of departure from the United States, such as an airline ticket.
• Document verifying the individual’s U.S. taxpayer identification number, such as a Social Security card or an IRS-issued CP 565 showing his or her individual taxpayer identification number.

Employees in the IRS offices will assist in filing Form 1040-C and Form 2063. Both forms include a “certificate of compliance” section, which must be signed by an IRS field assistance area director to certify that the individual’s U.S. tax obligations have been fulfilled.

Form 2063

Form 2063 is a short, informational form that does not include a tax computation. Before being issued a sailing permit, aliens filing Form 2063 must file any delinquent tax returns and pay any outstanding tax liabilities. Departing aliens in the following two categories can file Form 2063 to get their sailing permit:

• Aliens, whether resident or nonresident, who have had no taxable income for the tax year up to and including the date of departure and also for the preceding tax year, if the period for filing the income tax return for that year has not expired.
• Resident aliens who have received taxable income during the tax year or preceding year and whose departure will not hinder the collection of any tax. However, if the IRS has information indicating that the aliens are leaving to avoid paying their income tax, they must file a Form 1040-C.

Form 1040-C

Those who do not fall into one of the two categories listed above must file Form 1040-C to obtain a sailing permit. Income that is received during the tax year up to and including the departure date must be reported on Form 1040-C. Before being issued a sailing permit, aliens filing Form 1040-C must file any delinquent tax returns and pay any outstanding tax liabilities, including any amount shown as due on Form 1040-C.

If a departing alien plans on returning to the United States and can provide evidence to prove this claim to the IRS’s satisfaction, he or she can file Form 1040-C without the need to pay the tax that is shown as due on the form and still receive a sailing permit. All delinquent income tax returns must be filed, and any tax due on those returns must be paid.

Departing husbands and wives who are nonresident aliens cannot file joint returns. However, if both spouses are resident aliens, they can file a joint return on Form 1040-C, if:

• Both spouses can reasonably be expected to qualify to file a joint return at the normal close of their tax year, and
• The tax years of the spouses end at the same time.

Form 1040-C filers must pay all tax shown as due at the time of filing, except when a bond is furnished or the IRS is satisfied that the taxpayer’s departure does not jeopardize the collection of income tax. If Form 1040-C indicates the taxpayer has overpaid, the IRS cannot provide a refund at the time of departure. Taxpayers due a refund are required to file a Form 1040-NR at the end of the tax year to make a claim for the refund.

A taxpayer who has satisfied all prior-year tax liabilities can furnish a bond guaranteeing payment on the current-year amount due as reflected on Form 1040-C. The bond must equal the tax due plus interest to the date of payment as figured by the IRS. Information about the form of the bond and security on it can be obtained from the taxpayer’s IRS office.

The filing of Form 1040-C is not a replacement for the annual U.S. individual income tax return. If an income tax return was required to be filed, then the filing needs to be made even though the Form 1040-C has already been filed. The tax paid with the Form 1040-C filing is taken as a credit against the tax liability calculated on the taxpayer’s annual individual income tax return.

Budgetary restraints of the IRS and its attempt to provide more services online have resulted in a significant reduction of IRS offices throughout the country. The bulk of the offices closed were local “walk up” offices that provided taxpayers an opportunity to talk directly with IRS personnel. Older practitioners who had assisted taxpayers with sailing permits in the past may recall visiting a local office to have a client’s Form 1040-C stamped. If the IRS were to increase its enforcement in this area, it may be tough for taxpayers to comply given the lack of IRS offices and the present state of the Service’s phone operations.

As the IRS makes its determination on how it will implement the new passport revocation rule, it may also want to strengthen its mechanisms for enforcing the sailing permit rule. Enforcement of both laws would significantly increase the agency’s tax collection efforts.