In 2015, Congress passed the Fixing America’s Surface Transportation (FAST) Act, which requires the State Department to deny an individual’s passport application and revoke or limit an individual’s passport if the IRS has certified to the State Department that the individual has a “seriously delinquent tax debt.” After several years of non-enforcement, the IRS appears poised to finally act within the full scope of its authority, beginning in late February or March 2018. The terms of this authority are memorialized in Internal Revenue Code (I.R.C.) section 7345.
Beginning soon, the IRS will begin sending Notice 508C to taxpayers with seriously delinquent tax debt at the same time it certifies the tax debt to the State Department that the individual is seriously delinquent on his or her taxes. If an individual certified as having a seriously delinquent tax debt applies for a passport or a passport renewal, the State Department will hold the application of the certified taxpayer for 90 days to allow the taxpayer to resolve any certification issues, make a full payment of the tax debt, or enter into a satisfactory payment alternative (discussed below) before officially denying an application for a passport renewal. For U.S. citizens with existing passports and a seriously delinquent tax debt, the State Department may revoke or limit those individuals’ passports. For individuals who travel for work, this could have severe consequences.
Seriously Delinquent Tax Debt
Congress has defined a seriously delinquent tax debt to mean an unpaid, legally enforceable federal tax liability, including penalties and interest, of an individual which has been assessed and is greater than $50,000 (adjusted for inflation and currently at $51,000 for 2018). Additionally, for certification to occur, the tax liability or liabilities must have resulted:
- A Notice of Federal Tax Lien, under I.R.C. section 6323, being filed by the IRS and all the corresponding appeals rights under I.R.C. section 6320 exhausted or lapsed; or
- A levy under I.R.C. section 6331.
Essentially, if a taxpayer owes more than $51,000, including penalties and interest, and the IRS has either filed a lien or levied on their assets to collect against it, the taxpayer is in danger of the IRS certifying the tax debt to the State Department.
There are some important statutory exclusions to save taxpayers from having their tax debt certified to the State Department, under I.R.C. section 7345(b)(2). First, if the tax liability is being timely paid through an installment agreement, the IRS will not certify the tax debt to the Department of State. It is unclear, however, if this exception includes partial-pay installment agreements, where the taxpayer is making monthly payments, but will never satisfy the delinquent tax liability in full. A second exception is if payments are being made on an accepted Offer in Compromise of your tax liability, the IRS will similarly not certify the tax debt to the Department of State. Noteworthy about this exception is that a pending Offer in Compromise does not qualify as a statutory exception (though it may qualify as a discretionary exception, discussed below). Third, if collections are suspended because the taxpayer timely filed a Collection Due Process hearing request, the IRS is barred from certifying the debt for which the Collection Due Process hearing request corresponds until the Collection Due Process hearing is concluded. Finally, the IRS will not certify the debt if collection is suspended because the taxpayer is seeking relief from joint liability, under the Internal Revenue Code’s innocent spouse relief provisions.
In addition to the above statutory exclusions, there are several instances where the IRS will have discretion in certifying a tax debt to the Department of State. These include, among several others, instances where the tax debt is in currently not collectible status, where the taxpayer is the victim of identity theft, where the taxpayer is in bankruptcy, where the taxpayer is deceased, where the taxpayer’s Offer in Compromise is pending with the IRS, and where an installment agreement is pending with the IRS. It remains to be seen how liberal the IRS will be with these discretionary exclusions. See I.R.M. 5.1.12.27.4 (12-20-2017).
Notice of Certification and Decertification
The IRS has to notify taxpayers in writing in a letter mailed to your last known address that it is certifying your tax liability to the Department of State. It will do so on a notice titled Notice CP 508C. Likewise, any reversal must also be mailed to your last known address and will arrive on a notice titled Notice CP 508R. The IRS will reverse the certification of a seriously delinquent tax debt and notify the State Department within 30 days if the debt is fully satisfied, becomes legally unenforceable, or ceases to be a seriously delinquent tax debt. With respect to when a tax debt ceases to be seriously delinquent, the Internal Revenue Manual indicates that it is when one of the statutory exclusions from certification is fully met, so taxpayers cannot pay down a liability below the $51,000 threshold to reverse certification. See I.R.M. 5.1.12.27.8.1 (12-20-2017). However, it appears from the Internal Revenue Manual, that there is an exception to this “full pay” rule for certain types of penalty abatement requests that the IRS grants taxpayers. See I.R.M. 5.1.12.27.8.4 (12-20-2017).
Assuming a taxpayer qualifies for reversal of certification, it can take the IRS up to 30 days to provide notification to the State Department.
Judicial Review
Upon receipt of notice that a taxpayer’s tax debt has been certified to the State Department, the taxpayer will have the right to file a petition in the U.S. Tax Court or a lawsuit in U.S. District Court to have the court determine whether the certification is erroneous or whether decertification is appropriate. If a court finds in the taxpayer’s favor, it will order the IRS to notify the State Department that the certification was in error. Section 7345 does not provide the court authority release a lien or levy, nor does it allow for any award of money damages in a suit to determine whether a certification is erroneous.
Negotiating IRS Liabilities
The IRS estimates that 270,000 taxpayers meet the criteria for a seriously delinquent tax debt and do not meet one of the statutory exceptions or discretionary exclusions to certification discussed above. This should be cause for great concern, as the IRS has essentially unrestrained ability to deny, revoke, or limit a U.S. citizen’s passport with limited administrative appeals rights by a taxpayer. Further still, the impact on U.S. taxpayers with outstanding liabilities who live abroad is yet to be seen.
Going forward, negotiations with the IRS surrounding unpaid tax liabilities should focus on this important new tool that the IRS has for collections, and individuals with outstanding tax liabilities who travel frequently should be aware that the IRS now can impact their ability to leave the country. Taxpayers working with the IRS, either over the phone, via correspondence, or in person with a Revenue Officer, need to be careful to ensure that whatever resolution they work out with the IRS adequately deals with the IRS’s new ability to certify delinquent taxpayers to the State Department for passport revocation.