As part of the Fixing America’s Surface Transportation Act (“FAST Act”) of 2015, Congress mandated that the State Department deny any passport application for an individual, or revoke any previously issued passport for an individual, if the Internal Revenue Service (“the Service”) certifies that the individual has a “seriously delinquent tax debt.” In early 2018, the Service began certifying these debts and the State Department has begun denying and revoking passports. Those with outstanding tax debts must understand this new process to ensure that their travel will not be restricted for an extended period of time.
Whose Passports are Subject to Revocation?
There are several statutory requirements that must be satisfied for an individual’s debt to be certified as a “seriously delinquent tax debt,” as follows:
- The individual must have an unpaid, legally enforceable tax liability;
- The liability must be assessed;
- The liability must exceed $50,000 (after adjusting for inflation); and
- The Service must have filed a notice of federal tax lien under R.C. § 6323 (and the taxpayer’s collection due process rights have lapsed or have been exhausted) or made a levy under I.R.C. § 6331 with respect to the liability.
See I.R.C. § 7345(b). In a nutshell, this means that a taxpayer who has been notified of a balance (or balances) due and has not responded to several rounds of collection notices could have their passport revoked if the aggregate balance exceeds $51,000 (in 2018). As of February, 2018, the Service indicated that they would begin certifying these debts to the State Department and would notify taxpayers of certification through issuance of a Notice CP508C.
How Can Revocation Be Avoided?
For many taxpayers, it is much easier to avoid certification (i.e., initial revocation) than to go through the certification reversal process. The easiest way for taxpayers to avoid this is to comply with their tax obligations and stay current with their tax balances; however, for some with significant balances already outstanding, this is not an option. In those cases, it is important that taxpayers are proactive in addressing outstanding balances with the Service.
The Service is not permitted to certify tax debts unless collection due process rights have lapsed or been exhausted with respect to a certain period. That means that taxpayers must carefully review collection notices. If they receive a Final Notice of Intent to Levy or a Notice of Federal Tax Lien, strong consideration should be given to requesting a collection due process hearing. In the context of this hearing, taxpayers can frequently work out a collection alternative with the Service or, at the least, can buy more time to get their financial affairs in order and potentially pay their aggregate tax debt below the threshold (currently $51,000).
For those whose collection due process rights have lapsed, other options exist. There are a number of statutory and discretionary exclusions from the definition of a “seriously delinquent tax debt.” These exclusions include:
- Debt that is being paid in a timely manner under an installment agreement with the Service;
- Debt that is being paid in a timely manner under an Offer in Compromise with the Service or a settlement agreement with the Department of Justice;
- Debt on which collection is suspended because a request for innocent spouse relief under I.R.C. § 6015 has been made;
- Debt that is currently not collectible (CNC) due to hardship;
- Debt that resulted from identity theft;
- Debt of a taxpayer in bankruptcy;
- Debt that is included in a pending Offer in Compromise with the Service;
- Debt that is included in a pending installment agreement with the Service;
- Debt with a pending adjustment that will full pay the tax period; and
- Debt related to certain taxpayers in a disaster zone or combat zone.
See I.R.C. § 7345(b)(2); Internal Revenue Manual (“IRM”) 22.214.171.124.3 (12-20-2017); IRM 126.96.36.199.4 (12-20-2017). Therefore, for those with long overdue tax debts, it may be the time to proactively address these issues and consider requesting an Offer in Compromise, installment agreement, or some other collection alternative. Assuming that the request is not made to delay collection or otherwise made in bad faith, these actions should prevent otherwise imminent certification of an account.
How Long Does it Take for Revocation to Occur?
The certification and revocation process are recent additions to the Service’s collection arsenal, so it is yet to be seen how swiftly action will occur. That said, the Service indicates that it has already created computer codes to identify accounts eligible for certification. IRM 188.8.131.52.6 (12-20-2017). The Internal Revenue Manual indicates that “[t]axpayer certifications will be provided systemically to State Department on a weekly basis.” 184.108.40.206.6(4) (12-20-2017). Therefore, assuming that the Service can quickly and effectively notate when taxpayers’ collection due process rights and related appeal rights have expired (and all other requirements for certification have occurred), the certifications should be swift. Once the Notice of Certification (Notice CP508C) has been issued, it will be too late for taxpayers to reverse the action as certification is made to the Department of State simultaneously. The only remaining recourse is the certification reversal process.
What If My Tax Debt Was Already Certified?
Unfortunately, for many taxpayers, the certification reversal process will pose many problems that may not exist if the tax debts were addressed pre-certification. Once a tax debt is certified, it can only be reversed for several limited reasons:
- The certified tax debt is fully satisfied (i.e., paid off);
- The tax debt becomes legally unenforceable;
- The tax debt ceases to be a seriously delinquent tax debt; or
- The tax debt is found to be erroneous.
IRM 220.127.116.11.8 (12-20-2017). Importantly, full satisfaction of a certified tax debt requires that the total balance be paid off. For instance, if a previously certified tax debt of $52,000 is paid down to $47,000, reversal of the certification will not occur. Moreover, if a certified tax debt consists of several periods (e.g., $26,000 owed for each of 2012 and 2013), satisfaction of one period’s liability will not reverse the certification.
Absent full payment, taxpayers’ best opportunity to seek reversal of a certification is for the debts to cease being considered “seriously delinquent tax debts.” Since taxpayers will not likely have any collection due process rights remaining, their only available options in this regard would be to seek an installment agreement, Offer in Compromise, or innocent spouse relief. Aside from a request for innocent spouse relief, the mere request for an installment agreement or Offer in Compromise will not cause reversal of the certification (even though pre-certifications requests will prevent certification) as pending requests are not statutory exclusions from the definition of a “seriously delinquent tax debt” – they are only discretionary exclusions. For many, it can be months or years before these collection alternatives are considered or granted by the Service, so passports could remain revoked for a considerable amount of time while requests are pending. Even if reversal is granted, it may take 30 to 60 days for the reversal to be transmitted from the Service to the State Department. This underscores the importance of addressing liabilities prior to certification.
Aside from these potential avenues for relief, the Service may grant discretionary relief if a taxpayer files for bankruptcy, enters a combat zone, is determined to be currently not collectible (CNC), obtains request for decertification from the Department of State, or an adjustment to the account reduces the original certification amount below the threshold; however, it has yet to be seen how the Service will implement these forms of relief. IRM 18.104.22.168.8(4) (12-20-2017). At a minimum, the Service indicates that abatements to penalties for reasonable cause may qualify for relief provided they reduce the amount below the threshold; however, not all abatements – including First Time Abatement – qualify for such treatment. Id.
Finally, unlike many collection actions of the Service, certifications of “seriously delinquent tax debts” and revocation of passports do not trigger any collection appeal rights or other administrative appeal rights. IRM 22.214.171.124.9(1) (12-20-2017). A taxpayer whose tax debt is certified to the State Department may file suit in either United States Tax Court or a District Court of the United States; however, the only grounds for reversal of certification are based on a finding of an erroneous certification or existence of statutory grounds for reversal (that have not been followed by the Service). A Notice CP508C does not trigger any rights to contest the underlying tax liability or penalties in court. See IRS CC-2018-005 (April 5, 2018) (noting that section 7345 does not provide for judicial review of the amount of liability and that the government is immune to such challenges absent specific waiver by statute). The Service has also noted that certifications and reversals contested in court will be reviewed based upon computerized records used to make such determinations and reversal will likely be limited to action s that were “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” Id.
The ability to restrict the travel of those with significant tax debts is yet another tool in the Service’s playbook. Given the continuing budgetary constraints that have delayed otherwise normal collection action on accounts long overdue, the implementation of I.R.C. § 7345 should bring many more (unwilling) taxpayers to the negotiation table. For those that that need to travel abroad for business or pleasure, it is important that they address significant outstanding tax liabilities before their passports are denied or revoked. In this context, there are more options available if “seriously delinquent tax debts” are dealt with prior to certification than after certification.
These descriptions are intended for informational purposes only and should not be taken as legal advice on any particular set of facts or circumstances. Rosenberg Martin Greenberg, LLP is experienced in all aspects of federal and state tax laws, including tax planning, addressing prior compliance issues, tax audits and litigation, and more. Please contact Brandon Mourges at 410.951.1149 (firstname.lastname@example.org) for a free consultation.