Will the IRS really revoke my passport?
Technically, no, since the Internal Revenue Service is not in the business of administering passports—the State Department is. But the IRS can notify the State Department that a taxpayer has been certified as owing a seriously delinquent tax debt, and then the State Department may revoke a taxpayer's passport. This article addresses this new power of the IRS, the criteria to be certified, the right to judicial review of the IRS certification, and how you can avoid being certified, and thus, prevent the State Department from revoking your passport.
When did the IRS start certifying taxpayers for passport revocation?
It hasn't yet! But it will soon. Originally, it was expected that certifications would occur in 2017, but now, the IRS says it will certify the first taxpayers in January 2018.
Section 7345 of the Internal Revenue Code authorizes the IRS to notify the State Department that a taxpayer has been certified as owing a seriously delinquent tax debt. This section was added to the Tax Code in 2015 as part of the Fixing America's Surface Transportation Act (FAST Act). As part of the FAST Act, Congress required the State Department to deny a passport, or renewal of a passport, to any taxpayer that the IRS certified as having a seriously delinquent tax debt. The State Department also may revoke passports already issued to taxpayers with a seriously delinquent tax debt.
What is a seriously delinquent tax debt under I.R.C. § 7345?
A seriously delinquent tax debt must meet all of the following criteria:
- Unpaid, legally enforceable federal tax liability of an individual
- More than $50,000 that has been assessed – note that the $50,000 threshold is indexed yearly for inflation!
- A Notice of Federal Tax Lien has been filed and the taxpayer's right to a collection due process hearing under I.R.C. § 6320 has been exhausted or lapsed, or a levy has been issued.
All federal tax liabilities are included in federal tax liability, including the following:
- Individual income taxes
- All penalties and interest, including:
- Failure to file and failure to pay additions (penalties)
- Failure to pay estimated payments additions (penalties)
- Underpayment penalties
- Promoter and return prepare penalties
- Fraud penalties
- Frivolous submission penalties
- Joint liabilities for which both spouses are individually certified
- Business taxes for which the individual is directly liable. E.g. employment tax of general partners of a partnership and sole proprietors.
- Estate taxes for which an assessment has been made against an executor or a heirs under the I.R.C. § 6901 procedures
- Gift taxes
- Excises taxes
- Trust Fund Recovery Penalties (which are technically a tax, not a penalty)
The following are not included in federal tax liability:
- Title 31 penalties, such as FBAR penalties
- Criminal restitution assessments
- Affordable Care Act shared responsibility payment
- Child support collected by the IRS
If I owe more than $50,000, how do I prevent the IRS from certifying me to the State Department?
There are two exceptions that you want to meet if you owe the IRS more than $50,000. Even if you meet one of the exceptions, the debt will not be included in determining whether you owe a seriously delinquent tax debt:
- Debt that is being paid through an Installment Agreement, an Offer in Compromise entered into with the IRS, or debt that is being paid under the terms of a settlement agreement with the Department of Justice.
- Debt on which collection is suspended because of a request for a Collection Due Process hearing or innocent spouse relief. Note that a CDP equivalent hearing will not except the taxpayer from certification.
There is a third method of obtaining relief if you owe more than $50,000. But unlike the exceptions above, certification is only delayed, rather than stopped. If you are in a combat zone, as defined by I.R.C. § 7508, the IRS will postpone certification for six months.
The IRS has discretion to exclude tax liabilities from certification. The IRS's Internal Revenue Manual (IRM 18.104.22.168) provides the following additional exceptions from certification:
- Debt that is currently not collectible (CNC) due to hardship;
- Debt that resulted from identity theft;
- Debt as a result of criminal restitution assessments;
- Debt of a taxpayer in bankruptcy;
- Debt of a deceased taxpayer;
- Debt that is included in a pending offer; or
- Debt that is included in a pending installment agreement.
Be aware that these exceptions are subject to change at any time because they are determined by the IRS at the Commissioner's discretion, rather than by statute.
How will I know when the IRS is certifying me for passport revocation?
Certification will be an automatic process, meaning that once the IRS ramps up certification, it will affect many taxpayers, very quickly!
The IRS's computer system will automatically identify taxpayers that meet the certification criteria. The computer system will calculate all of a taxpayer's unpaid liabilities and determine whether more than $50,000 is owed. When a taxpayer meets the criteria for owing a seriously delinquent tax debt, a transaction code (TC 971 AC 641) will systemically upload to identify certified cases. The transaction code (TC 971 AC 641) will be added to IRS computer modules, Command Code (CC) ENMOD or CC IMFOLE, identifying the certified individual by their Social Security Number (SSN) and date of their certification notice (CP 508C).
Once a taxpayer is identified in the IRS's computer system, a list of all of the taxpayers will be sent to the State Department.
The IRS is required to notify you, in writing, at the time the IRS certifies seriously delinquent tax debt to the State Department. The IRS is also required to notify you in writing at the time it reverses certification. The IRS will send written notice by regular mail to your last known address. The notification of certification will be provided on Notice CP 508C—Notice of Certification. The notification will list the tax modules that gave rise to the certification, because the notification may list more modules than a taxpayer's power of attorney may be authority for, the notice will not be sent to any power of attorney. This means that only the taxpayer will receive notice, and you should carefully monitor your mail for these notices!
What rights do I have if I receive Notice CP 508C, notifying me that I have been certified to the State Department?
A taxpayer has a right to challenge his or her certification by filing suit against the United States in federal district court, or the Tax Court. There is no specified time in which the action must be brought.
Typically, before filing suit in federal district court for a tax matter, a taxpayer is required to file an administrative claim as a jurisdictional prerequisite. There is no similar requirement for passport certifications, meaning that taxpayers can go directly to federal district court. Although the statute does not provide for an administrative appeal, you can request that the IRS rescind its certification administratively, which is generally less expensive than filing suit.
If a taxpayer files suit, the court will decide whether the certification was erroneous, and if the taxpayer is arguing that that the IRS should have reversed the certification even if it certification was previously proper, the court will determine whether the IRS failed to properly reverse certification.
Section 7345 does not specify the standard of review to be applied. This is likely to be decided through litigation, but for the time being, taxpayers may be able to ague that the court reviewing an IRS certification should make it determination de novo, reviewing all issues as if for the first time, allowing the introduction of evidence that the IRS did not consider.
What happens after the IRS finishes certifying me to the State Department?
After the IRS completes the certification process, the State Department will hold your application for a passport for 90 days to allow you to:
- Resolve any erroneous certification issues
- Make full payment of the tax debt
- Enter into a satisfactory payment alternative with the IRS
How long will the State Department wait to revoke a passport based on the IRS certification? This process has not yet been determined. The State Department will first start denying new passport applications based on the IRS certification, but it has not yet detailed a process for revoking already issued passports. Since the State Department is allowing 90 days before it will deny a pending passport application, it seems likely that a taxpayer will receive notice from the State Department, and have at least 90 days to remedy the certification before revocation occurs. There also may be extended periods for taxpayers that are already abroad because dealing with the certification may be more difficult.
How will I know if the IRS reverses the certification to the State Department?
The IRS will issue Notice CP 508R to a taxpayer when it reverses a certification.
The IRS will reverse a certification when:
- The tax debt is fully satisfied or becomes legally unenforceable.
- The tax debt is no longer seriously delinquent.
- The certification is erroneous.
The IRS will make this reversal within 30 days and provide notification to the State Department “as soon as practicable.”
The IRS will not reverse certification where a taxpayer requests a collection due process hearing or innocent spouse relief on a debt that is not the basis of the certification. Also, the IRS will not reverse the certification because the taxpayer pays the debt below $50,000.
How will the Tax Court handle review of passport certification cases?
The Tax Court proposed new rules for these cases. The proposal is that the rules will appear under “Petition for Certification or Failure to Reverse Certification Act under Code Section 7345(e).” The Tax Court petition will be modified to include an indication that the case involves section 7345, and the Tax Court will add a “P” to the docket number to indicate that the case involves section 7345 (like it adds an S for small cases, an L for CDP cases, and W for whistleblower cases).
What should I do if I need help?
If you receive a CP508C, do not wait to address the passport certification. Call Brandon Keim at (602) 892-1500 for a free consultation. He can help you determine the best solution for stopping or reversing the certification, either by taking steps to ensure that the debt is not included in the definition of seriously delinquent debt, or by challenging the IRS's certification on procedural grounds.