Yes, yes they can- and sadly it is easier than you think.
If the IRS considers you "seriously delinquent" than they can notify the US State Department to revoke, or deny you from applying for a new passport
What would trigger the IRS to flag my passport?
Most flags will stem from being a "severely delinquent taxpayer", meaning that you owe at least $50,000 of US tax debt to the IRS.
One common myth is:
"Even though I have not filed returns in __ years, I would NEVER have a tax bill of $50,000."
When you have unfiled returns, IRS agents are able to create a "Substitute for Return", or SFR typically going back up to 7 years. When an agent prepares an SFR for you, they will look at any financial information available. Thanks to FATCA, this includes retrieving your Canadian or other overseas banking information. The IRS agent will then simply add up all of the deposits hitting your accounts in a particular year, give you the barebones minimum amount of deductions, and create a tax liability.
Suppose you are a married person living in Canada who earns $60,000 per year (for simplicity sake, let's assume the US to CAD exchange rate is at par) who has not filed returns in 15 years. Using the tax deductions, exemptions, and tax rates in force from tax years 2010-2016, you would have a cumulative tax liability of $59,393.
Even with an average income of $60,000 a year, you will exceed the $50,000 threshold if the IRS files SFR's on your behalf.
So, what do I do?
If you have received a notice from the IRS indicating that you have SFR's, we can file returns for all of the years the IRS posted SFR's for. Once you have returns filed, the SFR's go away and are replaced with your actual tax returns, which will take full advantage of all tax credits and deductions to reduce or eliminate your tax bill.
If you have not received anything form the IRS, we can get you right with the IRS again. Many people qualify under the streamlined procedures with the IRS. If you qualify, we can file the most recent three years' worth of returns and six years of bank reporting.
If you have any other questions, feel free to contact us.
About the author: Ian Davis is currently Canada’s only former IRS auditor; and Founder and President of US Tax Resources Inc. A Canadian firm whose mission is to provide stress relief from US tax through simple and affordable tax preparation and advisory services.
Ian is a dual US/Canadian citizen living with his family in Canada.