IRS to Start Revoking and Denying Passports for Tax Debtors

Authored by: Brian Gardner

February 26, 2018

After two years of dormancy, the IRS and State Department announced that they will begin denying and revoking passports for individuals with federal tax liabilities exceeding $51,000 authorized by the Fixing America’s Surface Transportation Act (“FAST Act”), P.L. 114-94, legislation enacted in December of 2015. On January 22, 2018, the IRS began certifying taxpayers’ seriously delinquent tax debts and submitting those certifications to the State Department. A seriously delinquent tax debt is an individual Federal tax liability exceeding $51,000 including interest and penalties.

Losing a passport is a serious consequence for any taxpayer who travels internationally including entrepreneurs, employees and professionals for whom international travel is a business requirement. But beyond that, this provision introduces additional complexities into the already daunting matrix of statutes, regulations and discretionary rules that govern IRS collection activity. Now at least two federal enforcement agencies must coordinate to resolve an individual tax controversy of more than $51,000.  

What does this mean for taxpayers who already owe the IRS more than $51,000?

A number of exceptions and alternatives exist to protect a taxpayer’s passport, but ignoring the IRS is not one of them. Section 7345(b) defines a seriously delinquent tax debt as an assessed, unpaid, legally enforceable individual Federal tax liability in excess of $51,000 for which the IRS has imposed a levy or filed a Notice of Federal Tax Lien (“NFTL”), and the taxpayer has exhausted his administrative rights or those rights have lapsed.[1] That basic definition is subject to four primary exceptions.

A seriously delinquent tax debt does not include a tax debt:

  • that is being timely paid under a formal installment agreement, [2]
  • that is being timely paid under an Offer in Compromise,[3]
  • for which collection is suspended because a collection due process hearing is requested or pending,[4] or
  • for which an election for innocent spouse relief or separation of liability relief is made or equitable innocent spouse relief is requested.[5]

If the IRS certifies a tax debt as seriously delinquent, section 7345(c) provides for the reversal of certification upon full payment or if one of the four listed exceptions applies. The Commissioner of Internal Revenue begins the reversal of certification process by giving notice to the Secretary of Treasury, who in turn notifies the Secretary of State.[6] The statute provides specific rules governing the timing of the notice requirement depending upon the reason for reversing the certification.[7] Upon receipt of the notice, the Secretary of State shall remove the certification of the debt from the individual’s record.[8]

The IRS is required to notify you in writing when they certify the seriously delinquent tax debt to the State Department. The IRS will send written notification to the taxpayer’s last known address using Notice CP 508C. This presents a unique problem for international taxpayer’s who use an address in the United States when they file their U.S. tax returns. Unless the taxpayer gives written notice of a change of address, the IRS will continue to mail all IRS notices to the address listed on the taxpayers most recently filed U.S. tax return. This will create problems for international taxpayers receiving a notice from the IRS at a U.S. residence or post office box that their passport was revoked while residing abroad.

Administrative Exceptions

The IRS released additional administrative guidance to the statutory exceptions covering taxpayers in the grey areas left by the statute. These exceptions are based on “codes” designating the taxpayers’ account as a certain status. The most reliable way to get an account “coded” is to contact the IRS. The discretionary exceptions for debts that would otherwise qualify as seriously delinquent tax debts cover the following situations:

  1. Debt that is in currently not collectible (CNC) due to hardship;
  2. Debt that resulted from identity theft;
  3. Debt of a taxpayer in bankruptcy;
  4. Debt of a deceased taxpayer;
  5. Debt that is included in a pending Offer in Compromise (OIC), but the OIC must not be made solely to delay collection and meet the pending OIC criteria;
  6. Debt that is included in a pending installment agreement;
  7. Debt with a pending adjustment that will fully pay the tax period; and
  8. Taxpayers in a Disaster Zone.[9]

Each of these discretionary exceptions is nuanced and contains obstacles for those unfamiliar with the Internal Revenue Manual and IRS collection procedures. For example, a taxpayer in currently not collectible status in one year may find that their account was automatically removed from that status when their next tax return shows a higher income. A taxpayer may not get notice that their account is out of currently not collectible status until they receive the CP508 notice that their tax debt has been certified.

Judicial Review

Once the IRS certifies the taxpayer’s seriously delinquent tax debt, the IRS is required to contemporaneously notify the taxpayer of the certification and their right to judicial review to determine whether the certification was erroneous.[10] The same right of judicial review is available if the Commissioner has failed to reverse the certification of a seriously delinquent tax debt. Taxpayers may seek review in the U.S. Tax Court or the U.S. District Courts.[11] If the court determines that the certification was erroneous then the court may order the IRS to notify the State Department that their certification of the liability was erroneous.[12] The U.S. Tax Court has proposed additional amendments to its rules to accommodate a taxpayer petitioning the court to have their passport certification reversed. The procedures are similar to a taxpayer petitioning a Collection Due Process Notice of Determination.

Conclusion

Delinquent taxpayers should not wait for notice that the IRS certified their tax debt. There are several procedural rights that can shield proactive taxpayers from a cancelled passport. If you owe the IRS more than $51,000 and need your passport, it is time to make sure that you have a valid agreement with the IRS to resolve your debt.

References:

[1] § 7345(b)(1).
[2] § 7345(b)(2)(A).
[3] Id.
[4] § 7345(b)(2)(B)(i).
[5] § 7345(b)(2)(B)(ii).
[6] § 7345(c)(1).
[7] § 7345(c)(2).
[8] 22 U.S.C. § 2714a(g).
[9] I.R.M. 5.1.12.27.4 (12-20-17).
[10] § 7345(e)(1).
[11] § 6330(d)(1); § 7345(e)(1).
[12] § 7345(e)(2).
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