The Internal Revenue Service has once again delayed the start date for implementation of a new law authorizing the State Department to revoke the passports of taxpayers with sizeable tax debts.  According to an IRS web site page entitled “Revocation or Denial of Passport in Case of Certain Unpaid Taxes” (updated as of September 6, 2017), the IRS has not yet started certifying tax debt to the State Department, and such certifications will not begin until January 2018.  As we noted in prior posts (here, here, and here), the IRS had initially announced that certifications to the State Department would begin in “early 2017,” and then later revised that announcement to sometime “in 2017.”  No reason was provided for the further delay to 2018, although we presume that Treasury and the IRS are in the process of drafting regulations implementing the new law.

The passport revocation measure was enacted into law in December 2015 as part of the Fixing America’s Surface Transportation Act (FAST Act), which contained two controversial measures designed to assist the IRS in collecting delinquent taxes: (1) re-authorizing the use of private collection agencies for certain delinquent tax accounts; and (2) authorizing the State Department to revoke, or deny, passports to taxpayers with “seriously delinquent tax debt.”

“Seriously delinquent tax debt” is defined as a federal tax liability that been assessed and is greater than $50,000 (including 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. 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 $50,000.

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.  The new law is not without its critics, however, as we noted in a prior post addressing sharp criticism leveled by the Taxpayer Advocate.

On September 11, 2017, the Treasury Inspector General for Tax Administration (TIGTA) issued its final report discussing IRS compliance activities through fiscal year 2016 (the federal government’s fiscal year begins on October 1 and ends on September 30). TIGTA compiles statistical information reported by the IRS and issues the report annually in response to continuing stakeholder interest in the analysis and trends in IRS Collection and Examination function activities. Here are the highlights:

  • IRS Budget Increased, but Staffing Declined. Although the IRS budget increased in 2016, IRS staffing continued to decline. The budget increase was intended to improve customer service, prevent fraud and identity theft, and enhance cybersecurity to safeguard taxpayer data.
  • The Number of Tax Returns Examined Declined. The number of tax returns examined in 2016 decreased approximately nine percent compared to 2015. The number of examinations conducted in 2016 is approximately 32 percent lower than the number conducted during 2012. The report attributes the significant reduction in the number of examinations over that time period to a continued decline in examination staffing, which reached a 20-year low in 2016.

Percentage Change in the Number of Field Examiners and Examinations Since FY 2012

Source: IRS Data Book and Table 37 Examination Program Monitoring

 

  • IRS Issued Fewer Liens and Levies. The number of liens and levies issued continued to decline in 2016. The IRS issued its fewest amount of liens and levies since 2002.
  • Payment Alternatives – Increase in Direct Debit Installment Agreements. The number of direct debit installment agreements (a payment option available to certain taxpayers who cannot fully pay their tax obligations on time) has increased by 128 percent since 2012. The increased use of this payment option is likely attributable to reductions in enforcement personnel and the need to efficiently and effectively collect outstanding tax liabilities.
  • Legislative Initiatives. In December 2015, Congress enacted the Fixing America’s Surface Transportation Act. The law contains two measures designed to assist the IRS in collecting delinquent taxes: (1) authorizing the use of private debt collectors for the collection of outstanding inactive tax receivables, and (2) authorizing the State Department to revoke, or deny, passports to taxpayers with seriously delinquent tax debt. The IRS began assigning cases to private debt collection agencies in April 2017. The IRS also worked to coordinate with the State Department to implement the passport revocation program. You can read more about the passport revocation program here and here.

You can read the full report here.

Yesterday the Taxpayer Advocate published a blog post entitled “The IRS’s New Passport Program: Why Notice to Taxpayers Matters (Part 1 of 2)” which criticizes the Internal Revenue Service’s planned initiative to revoke, or deny, passports of individuals who have substantial tax liabilities. We have previously covered the planned rollout of this program by the IRS here and here. In our last article on this subject, we reported — based on information contained on the IRS website — that the IRS planned to begin issuing certifications of individuals with “seriously delinquent tax debt” to the State Department in “early 2017.” According to the IRS web page addressing the passport revocation program – which was last updated on June 2, 2017 – certifications to the State Department have in fact not yet started, but are slated to begin at some point “in 2017.” According to the Taxpayer Advocate, “there is no firm date for implementation” of the passport revocation/denial program at this time, although the IRS plans to publish a notice providing more details about the program shortly before implementation.

The passport revocation provision was enacted into law in December 2015 as part of the Fixing America’s Surface Transportation Act (FAST Act), which contained two controversial measures designed to assist the IRS in collecting delinquent taxes: (1) re-authorizing the use of private collection agencies for certain delinquent tax accounts; and (2) authorizing the State Department to revoke, or deny, passports to taxpayers with “seriously delinquent tax debt.”

“Seriously delinquent tax debt” is defined as a federal tax liability that been assessed and is greater than $50,000 (including 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. 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 $50,000.

In the blog post, the Taxpayer Advocate notes prior efforts by the U.S. government to restrict issuance of passports to individuals with other types of non-tax debt:

The concept of restricting a person’s travel to incentivize behavior isn’t new. In 1996, Congress passed the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996, which requires the DOS to deny a passport application and allows the DOS to revoke or limit a passport if the person owes delinquent child support exceeding $5,000 (subsequently lowered to $2,500). Courts have long recognized that the right to travel internationally is a liberty right, protected by the Due Process Clause. See e.g., Kent v. Dulles, 357 U.S. 116 (1958). In the context of passport denial for unpaid child support, courts have found the statute meets due process requirements because it provides for notice and an opportunity to be heard prior to the state agency certifying the unpaid child support to the federal government. Weinstein v. Albright, 261 F.3d 127 (2nd Cir. 2001), aff’g 2000 WL 1154310 (S.D.N.Y. 2001).

The Department of Health and Human Services, Office of Child Support Enforcement (OCSE) requires states to issue (or request OCSE to issue) a Pre-offset Notice (PON) for all new cases within the Federal Tax Refund Offset Program, the Administrative Offset Program, and the U.S. Passport Denial Program. Following the issuance of a PON, there is a 30 day holding period before the passport denial occurs. The primary focus of the PON is to communicate the pending consequences of not resolving the unpaid amount – that is, administrative offset, federal tax refund offset, and passport denial if the amount is greater than $2,500. You can view a sample PON in the OSCE Federal Offset Program Technical Guide. The OSCE Guide strongly encourages states to send repeated PONs to the noncustodial parents at least annually.

The Taxpayer Advocate’s primary concern about the new IRS passport revocation program is its lack of meaningful notice and opportunity to be heard, which are the hallmarks of constitutional due process:

In the context of passport denial for a seriously delinquent tax debt, notice and an opportunity to be heard prior to the certification are limited. The FAST Act only requires two forms of notice to taxpayers who will be certified:   (1) a notice sent to the taxpayer close to or at the same time as the IRS certifies the seriously delinquent tax debt (“contemporaneous notice”), and (2) language included in Collection Due Process (CDP) hearing notices explaining the potential certification.

Unlike the PONs in the child support context, currently, the IRS does not plan to provide any additional, direct notice to affected taxpayers beyond the statutory requirements. I believe this lack of notice may not satisfy taxpayers’ due process rights under the Fifth Amendment of the Constitution because taxpayers do not have a meaningful opportunity to be contest the certifications prior to them taking place. Furthermore, it infringes on the Taxpayer Bill of Rights, notably the right to be informed and the right to challenge the IRS’s position and be heard. The passport language in the broader CDP notice is delivered at a time when the taxpayer is focusing on resolution of the debt and claiming CDP rights – thus the language is buried among the other information and may not constitute effective notice. This is in contrast to the child support PON, which focuses primarily on the soon to occur consequences – offset and passport denial. Additionally, some taxpayers may not have the benefit of the passport language in the CDP notice at all because they received their CDP notices prior to the IRS including this language. At this time, the IRS has no plans to send a separate notice to these taxpayers.

Although the passport revocation program has not yet been implemented, the IRS is now including the following warning language on levy notices:

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 $50,000 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 $50,000 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.

The Taxpayer Advocate’s critique of the passport revocation program continued by calling for the IRS to provide additional notice to affected taxpayers that their right to travel may be at risk:

The IRS’s current policy of relying exclusively on the CDP notice to provide pre-certification notice also ignores behavioral research. This is a topic I discussed last year in the Annual Report to Congress Most Serious Problem on Voluntary Compliance and in a related Literature Review on Behavioral Science Lessons for Taxpayer Compliance. One topic that came up repeatedly in the literature was the concept of salience, focusing on the timing and relevancy of communications. A simple way to increase the salience of the passport notice would be to issue a stand-alone notice shortly before the certification, similar to the child support PON that is issued 30 days prior.

The IRS needs to approach passport certifications from the point of view, “If we want people to do something, what’s the best way to make that happen?” Here, the IRS wants taxpayers to resolve their tax debts – either by fully paying the liability, entering into a payment plan, or having their accounts corrected if the liability is incorrect. A stand-alone notice, focusing only on the pending harm that will occur if the taxpayer does not resolve their account quickly, is likely to be successful in prodding taxpayers to take action. However, the IRS doesn’t plan to send out a separate notice other than the notice at the time of the passport certification, which triggers many kinds of actions.

As the IRS and State Department are preparing to implement the passport revocation program, it remains to be seen whether those agencies will take note of any of the Taxpayer Advocate’s comments, particularly her concerns about meaningful lack of notice and opportunity to be heard before certification to the State Department. The Taxpayer Advocate concludes by noting that in her next blog post, she intends to discuss “the actual operations of the passport certification process, showing how the IRS’s lack of notice leads to an inefficient and burdensome process.” Stay tuned.

passportThe Internal Revenue Service is moving forward with implementation of a new law requiring the State Department to deny, or revoke, the U.S. passports of individuals who owe the IRS more than $50,000. 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.

A new provision of the Internal Revenue Code now authorizes the Treasury Secretary to certify, to the Secretary of State, that a taxpayer has a “seriously delinquent tax debt.” According to the IRS website, certifications to the State Department will begin in early 2017. Upon receipt of certification from the IRS, the Secretary of State is authorized to revoke the taxpayer’s passport or impose restrictions on the use of such passport, such as limiting its use to return travel to the U.S. only. The Secretary of State is also prohibiting from issuing a new passport to any individual who has a “seriously delinquent tax debt,” with limited exceptions provided for emergency circumstances or humanitarian reasons. Taxpayers who are serving in combat zones are granted relief from the law’s provisions.

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 passports revoked or applications for passports denied. “Seriously delinquent tax debt” is defined as a federal tax liability that been assessed and is greater than $50,000 (including 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.

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 $50,000.

New Taxpayer Notifications

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 CP 508C” 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 must 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 $50,000 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 $50,000 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 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.

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 CP 508R” 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 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 $50,000, but not to zero.

Judicial Review

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.

Conclusion

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 $50,000 and are concerned about the possibility of passport revocation 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 $50,000 and fail to heed these warnings will face dire consequences with respect to their ability to travel to and from the United States.

For questions or more information about this alert, please contact Matthew D. Lee at 215.299.2765 or any member of the firm’s Tax Controversy and Litigation practice.