I'm not sure I see how. Seems like a great incentive, actually. Your passport is about to expire, but you're not going to get a new one unless you settle your debts.
I doubt people with more than $50k in tax debt are the kind of people who can't come up with the money, they're just the people who don't want to.
If you live and work overseas, the IRS commonly miscalculates money owed. This can leave one stranded through no fault of their own and/or seriously interrupt a career. This law doesn't only sweep up tax evaders...
It's not like they immediately revoke your passport as soon as the IRS decides that you owe them money. You need to get a lien or levy against you. People who are contesting the debt either administratively or in court or who have a payment agreement with the IRS can still get a passport.
The State Department can also bypass the rule for emergencies or humanitarian reasons and will do so to allow someone to return to the US, so it is not possible to be stranded outside of the country because of this.
Re: Part I - Yes. Getting a payment agreement works. This is nicer when you aren't caught by surprise.
Re: Part II - "Home" for many is not the US. That's just citizenship. Trying to island hop across the South China seas without an "active" passport is problematic. Or if one were to return to the US to bury a parent, getting back to work can be problematic.
I'm not arguing that it can't be worked through. But it is a real time-consuming hassle, esp. when caught unawares because of bureaucratic snafu, that can be career limiting when caught on the wrong side of a dotted line...
About $120K~$150K depending on the host country and their particular income tax scheme. Which is not a crap salary, but it's certainly not over the moon Fortune 500 executive comp either. ($50K is about 1/3 of $150K, which is about what a W2 employee would pay - 1099 folks would pay a bit more)
There's supposed to be a deduction applied to income taxes paid to your host country - up to a cap. There are two intersecting curves related to host-country taxes paid and US income taxes owed minus the exempted part, which I'm not going to describe here, but through key-entry error or whatever bureaucratic things that happen in paper-processing-office, it is not uncommon to get a bill on a year for about that amount. IF their response to your filing in a year (say 2012) gets lost in the mail and IF the same thing happens the following year - you can owe $100K (on paper - even though mistaken), and not even know it.
I once received a mistaken IRS tax bill of $600,000, more than I had earned in my entire life up to that point. After much paperwork filing, they decided I actually owed them nothing but I still had to go through the process contesting it and providing stacks of documentation. Ironically, they already had the exact same information I had, they simply didn't bother to look at it. So I can easily imagine that it wouldn't be difficult for the IRS to make a mistake and come up with figures much higher than $51k.
To their credit, the IRS was fairly reasonable to work with while this was going on. I think the examiner caught on pretty quickly that something didn't make sense.
Of the two or three dozen Americans I have met working overseas for an extended period over the last 25-or-so years, I don't think I know of one that hasn't had it happen at least once... Most end up hiring KPMG (or some such firm -- which is not cheap) to end up doing the filings and follow-up, just so it never (ever) falls through the cracks again...
EDIT: There are about 5M Americans working overseas. At an error rate (of this type) of about 5% (anecdotally, I'd put it certainly above 3% and usually (most years) below 10%), that's still hundreds of thousands of Americans each year who get to have their life thrown into a tailspin. It's not so simple as having the DMV mis-spell your middle-name or shipping your driver's license to the wrong address.
Is this just denied a new passport? Or the ability to leave. If it is just a new passport that would drop the numbers considerably..... also it depends on what the owing the IRS actually means.
I noted in another comment that I've had my run ins with the IRS before. Provided you respond to them in a timely fashion (they give a lot of time) they consider it is in one phase.
If you don't respond, then it is another phase.
I'm wondering if we're talking about situations where the situation is in a particular phase. Not just the IRS asking, but if you already chose not to respond....
I don't know much about these phases, because I have tried to respond as soon as requested (although there have been some scares because of lost letters).
I do know of a several people (4 to be precise, in the last several months) that have (had) non-expired passports denied permission to leave the country (the US) to return home to work, and one person who was no able to renew an expired passport at the embassy of their host country of 20 years (Japan)[fn]. This is all anecdote, and maybe they were in Phase 1+N of your scheme...
[fn] One could argue the wisdom of spending one's entire life/career working in Japan, knowing that they will boot you out as soon as you hit 65 y.o., but that's a different conversation!
I agree it sounds weird. And if you stay in one country - having a local boutique with US tax experience makes more sense. If you bounce around, it's nice to have someone with presence in all the places you might end up traversing. Also, depending on who you work for, sometimes employees can get a deal dealing with their corporate's accountants.
I doubt people with more than $50k in tax debt are the kind of people who can't come up with the money, they're just the people who don't want to.