Individuals who owe more than $51,000 in back taxes are now at risk of losing their U.S. passports under a new law requiring the Internal Revenue Service to notify the State Department of taxpayers with “seriously delinquent tax debts.”
This month the IRS will begin the process of certifying delinquent taxpayers to the State Department, which is required by law to deny passport applications (or renewal applications) filed by such individuals, and in some instances revoke existing passports. The IRS estimates that 270,000 individuals currently meet the criteria for certification to the State Department, and expects to certify an initial group this month, with additional certifications to follow weekly throughout 2018.
The passport revocation measure became law in December 2015, when President Obama signed a five-year, $305 billion highway funding bill that included several controversial tax measures designed to help fund the legislation, including authorizing the revocation of passports in the case of unpaid taxes and the use of private debt collectors to collect taxes. After more than two years of preparation, the IRS is now ready to begin the passport certification process. On January 16, the IRS published Notice 2018-01 which provides taxpayers with information regarding the circumstances under which the State Department may revoke, limit or deny a passport due to tax delinquencies. On that same day, the IRS unveiled a media campaign urging travelers requiring passports to pay their back taxes or enter into payment arrangements in order to avoid jeopardizing their passports.
Passport Revocation as a Tax Collection Tool
The threat of passport revocation provides the IRS with a powerful tool to force tax compliance, particularly for non-residents or dual citizens who regularly travel to or from the United States. Until Congress enacted this new law in December 2015, the State Department had no authority to restrict the issuance of passports to individuals because they owed back taxes. In contrast, other federal laws authorize the State Department to deny or revoke the issuance of passports in certain circumstances, such as in the case of individuals with delinquent child support obligations.
Several years ago, the Government Accountability Office studied the potential for using passport issuance/revocation to increase collection of unpaid federal taxes. As part of that study, the GAO found that during fiscal year 2008, the State Department issued passports to more than 224,000 individuals who collectively owed the IRS in excess of $5.8 billion in back taxes. The GAO concluded that even this amount was likely substantially understated, as it did not include amounts owed by taxpayers who did not file a tax return or by businesses associated with such taxpayers.
‘Seriously Delinquent Tax Debt’
Under the new law, individuals with “seriously delinquent tax debt” may have their applications for passport issuance or renewal denied, or their passports revoked. “Seriously delinquent tax debt” is defined as a federal tax liability that been assessed and is greater than $51,000 (including assessed interest and penalties), and for which the IRS has either filed a lien or levy. The dollar threshold will be adjusted for inflation every year.
“Seriously delinquent tax debt” includes not only individual income taxes, but also includes trust fund recovery penalties (for unpaid employment taxes), business taxes for which the individual is liable and other civil penalties. Penalties assessed for failure to file a Report of Foreign Bank and Financial Accounts (commonly referred to as the FBAR form) are non-tax debts and are not included in the definition of “seriously delinquent tax debt.”
Taxpayers who have entered into installment agreements or offers-in-compromise, or have requested collection due process hearings or innocent spouse relief, are not considered to have “seriously delinquent tax debt” even if they owe the IRS more than $51,000. In addition, the IRS will postpone certification to the State Department of delinquent taxpayers who are serving in a combat zone.
The IRS has discretion to exclude the following categories of tax debt from certification to the State Department, even if those debts otherwise meet the criteria for certification:
- Debt that the IRS considers “currently not collectible” due to hardship;
- Debt that resulted from identity theft;
- Debt of a taxpayer in bankruptcy;
- Debt of a deceased taxpayer;
- Debt that is included in a pending offer-in-compromise or pending installment agreement; and
- Debt of taxpayers in a disaster zone.
The law includes certain safeguards to protect taxpayer rights. Taxpayers who are certified to the Secretary of State as having a “seriously delinquent tax debt,” or whose certifications are subsequently revoked, are entitled to prompt written notice. The IRS will mail Notice CP508C to the taxpayer’s last known address notifying the taxpayer of his or her certification to the State Department for having “seriously delinquent tax debt.”
In addition, the new law amends existing Internal Revenue Code provisions to ensure that taxpayers are warned in advance that they could be subject to U.S. passport denial, revocation or limitation. For example, notices of federal tax lien and notices of intent to levy now include language advising the taxpayer that they may be certified to the Secretary of State as having a “seriously delinquent tax debt” with attendant passport consequences. The specific language that now appears on IRS levy notices is as follows:
Denial or Revocation of United States Passport
On December 4, 2015, as part of the Fixing America’s Surface Transportation (FAST) Act, Congress enacted section 7345 of the Internal Revenue Code, which requires the Internal Revenue Service to notify the State Department of taxpayers certified as owing a seriously delinquent tax debt. The FAST Act generally prohibits the State Department from issuing or renewing a passport to a taxpayer with seriously delinquent tax debt. Seriously delinquent tax debt means an unpaid, legally enforceable federal tax debt of an individual totaling more than $51,000 for which a Notice of Federal Tax Lien has been filed and all administrative remedies under IRC § 6320 have lapsed or been exhausted, or a levy has been issued. If you are individually liable for tax debt (including penalties and interest) totaling more than $51,000 and you do not pay the amount you owe or make alternate arrangements to pay, we may notify the State Department that your tax debt is seriously delinquent. The State Department generally will not issue or renew a passport to you after we make this notification. If you currently have a valid passport, the State Department may revoke your passport or limit your ability to travel outside of the United States. Additional information on passport certification is available at www.irs.gov/passports.
Before denying a passport application or renewal as a result of a certified tax debt, the State Department will hold such application for a period of 90 days to allow the applicant to either pay the tax liability in full or enter into a payment arrangement with the IRS. Note, however, that the State Department will not grant a similar grace period before revoking a passport as a result of a tax debt. The State Department may, notwithstanding IRS certification, issue a passport if emergency circumstances or humanitarian reasons justify such action.
Taxpayer Options If Certified to the State Department
Once a taxpayer has been certified to the State Department as having “seriously delinquent tax debt,” such certification will only be reversed if (1) the tax debt is fully satisfied or becomes legally unenforceable (such as when the 10-year statute of limitations for collection expires); (2) the tax debt is no longer considered “seriously delinquent”; or (3) the original certification was erroneous. The IRS will provide notice as soon as practicable if the certification is erroneous by mailing Notice CP508R to the taxpayer’s last known address. The IRS will provide notice within 30 days of the date the debt is fully satisfied, becomes legally unenforceable or ceases to be seriously delinquent.
A previously certified tax debt is no longer considered to be “seriously delinquent” when any of the following occur:
- The taxpayer enters into an installment agreement with the IRS allowing payment of the debt over time;
- The IRS accepts an offer-in-compromise to satisfy the debt;
- The Justice Department enters into a settlement agreement to satisfy the debt as a result of litigation;
- Collection is suspended because the taxpayer requests innocent spouse relief; or
- The taxpayer submits a timely request for a collection due process hearing in connection with a levy to collect the debt.
The IRS will not reverse certification where a taxpayer requests a collection due process hearing or innocent spouse relief on a tax debt that is not the basis of the certification. Also, the IRS will not reverse the certification simply because the taxpayer makes a payment that brings the debt below $51,000, but not to zero.
In addition, the IRS has discretion to request decertification in the following situations:
- A certified taxpayer files a bankruptcy proceeding;
- A certified taxpayer enters a combat zone;
- A certified taxpayer’s debt is determined to be currently not collectible due to hardship;
- The State Department requests decertification; or
- An adjustment to a return, or the filing of an amended tax return, reduces the tax debt below the $51,000 threshold.
Under limited circumstances, the IRS may request expedited decertification. In order to qualify, the taxpayer must be eligible for decertification; the taxpayer must have foreign travel scheduled within the next 45 days; and the taxpayer must have a passport application or renewal pending before the State Department.
A taxpayer whose debt has been certified to the State Department has the right to challenge such certification by filing suit in the U.S. Tax Court or a federal district court to challenge the certification. A taxpayer may also file suit to challenge an IRS refusal to reverse a certification. If the court determines that the certification was erroneous or should have been reversed, it can order reversal of the certification. The law does not require a taxpayer to exhaust any administrative remedies before filing suit.
The ability to cause passport revocation or denial provides the IRS with powerful leverage over individuals who are delinquent in their tax debts. Taxpayers who owe the IRS more than $51,000 and are concerned about the possibility of losing their passport must take immediate steps to address their outstanding tax liabilities, by either paying such debt in full or seeking to negotiate a collection alternative such as an installment agreement or offer-in-compromise. In addition, because the IRS will mail certification notices to the taxpayer’s last known address, it is critically important that taxpayers ensure that the IRS has an up-to-date address on file so notices are timely received and can be addressed promptly. Individuals who owe the IRS more than $51,000 and fail to heed these warnings will face dire consequences with respect to their ability to travel to and from the United States.
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