Florida Bar Journal

Passport Revocation for Seriously Delinquent Tax Debt

Internal Revenue Code §7345 allows the IRS to certify to the secretary of state that an individual has a seriously delinquent tax debt that will cause the secretary of state to deny, revoke, or limit a passport. Section 7346 was enacted on December 5, 2015, as part of the Fixing America’s Surface Transportation Act (FAST Act).^[1] However, it was not until 2018 that the IRS started enforcing that statute as the IRS and Department of State had to work out both the internal and cross-departmental processes and procedures to effectuate enforcement. Given the relatively low threshold of outstanding tax liability required for certification, as well as the impact of limiting international travel, all attorneys should be aware of the implications of this newly enforced law for themselves and for their clients, regardless of the legal discipline they practice.

Certification for passport revocation (or denial or limitation) only occurs when there is a “seriously delinquent tax debt.” A seriously delinquent tax debt is an

unpaid, legally enforceable Federal tax liability of an individual — which has been assessed, which is greater than $50,000, and for which a notice of lien has been filed pursuant to [§]6323 and the collection due process rights under [§]6320 have been exhausted or lapsed or a levy is made pursuant to [§]6331.^[2]

The requirement of having due process rights expire under the statutory lien and levy provisions is an important component to the certification statute as it requires that due process protections under lien or levy provisions be expended first before passport revocations can occur. Consequently, there are no new due process rights and procedures as part of the revocation procedure. As such, the legislative drafters decided that a pending equivalency hearing will not preclude a liability from being considered a seriously delinquent tax debt.^[3]

The IRS is required to provide a taxpayer notice of the certification of a seriously delinquent tax debt contemporaneously with the notice that the IRS sends to the Department of State. Some critics, including the National Taxpayer Advocate, take issue that there is not a stand-alone prior notice that is required and, as such, there is no meaningful opportunity to contest a certification before it occurs.^[4] Another common complaint is that the letter is not required to be sent via certified mail. Because due process rights are at play with notices of liens and notices of intent to levy, those notices are sent certified. The passport revocation certification notice is IRS notice number 508C. As with all IRS notices, the notice is sent to the last known address of the taxpayer, which is usually the address listed on the most recent return filed. If an individual has not filed returns for several years, or moved during the year, then he or she may not receive the notice. The 508C notice itself is lacking in that it does not inform a taxpayer of his or her various options to resolve the issue or to have the certification reversed.

What Happens After Certification

When a taxpayer applies for a passport, the taxpayer will receive a letter from the Department of State indicating that they are ineligible to receive passport services due to the certification of seriously delinquent tax debt. It further informs the taxpayer that the Department of State or passport agency does not have information concerning the seriously delinquent tax debt and to contact the IRS within 90 days of the letter. The state department’s letter also does not indicate how to resolve the tax debt or identify the taxpayer’s various options. Nor does it advise an individual of a procedure for obtaining a passport in an emergency or life-threatening situation.

The state department not only has the right to deny a new passport application but also has the right to revoke or limit an existing passport.^[5] However, the statute provides that a previously issued passport will be limited to allow for return travel to the U.S., or, if there was not a previously issued passport, that a limited passport may be issued that only permits return travel to the U.S.

The “greater than $50,000” requirement is indexed for inflation, which is calculated by using cost-of-living adjustments.^[6] For 2019, a seriously delinquent tax debt includes liabilities of $52,000 and above.^[7] Seriously delinquent tax debt includes tax assessments made under an individual taxpayer’s identification number, such as U.S. individual income taxes, trust fund recover penalties, business taxes for which the individual is liable, and other civil penalties.^[8] It does not include accrued interest and penalties.^[9] It also does not include any Affordable Care Act assessment, employer-shared responsibility payments, criminal restitution assessment, child support obligations, or Report of Foreign Bank and Financial Accounts (FBAR) assessments.^[10] Once a taxpayer is certified, paying down the balance below the threshold amount effective at the time of certification will not result in decertification.^[11]

The statute itself provides certain exceptions to the “seriously delinquent tax debt” definition. A seriously delinquent tax debt does not include a debt in which payments are being made under an established installment agreement or an approved offer in compromise settlement.^[12] It also does not include a tax debt where a collection due process hearing is pending based on a proposed levy or where the taxpayer has an innocent spouse relief claim pending.^[13] If certification does occur and one of those exceptions are applicable at the time of certification, it is grounds for a taxpayer to file a petition in Tax Court or federal district court for an erroneous certification. Under these circumstances, the certification may also be able to be reversed with a call to an IRS ACS call center as well.

There were a lot of unanswered questions about the statute and the exceptions to the seriously delinquent tax debt definition when the statute was enacted. The exceptions provided by statute are extremely limited and exclude what many tax practitioners thought to be other valid exclusions to certification. The IRS responded to the criticism and extreme limitations afforded by the statutory exclusions and allowed several gap-fill measures to provide discretionary certification exclusions even if taxpayers do not meet the statutory certification exceptions. These discretionary exclusions are subject to change so they may not be able to be relied upon permanently.^[14] Discretionary certification exclusions include tax debt that is in currently not collectible status; tax debt that has resulted from identity theft; relief for taxpayers that are in a disaster or combat zone; relief where the taxpayer has filed bankruptcy; and when there is a pending offer in compromise or a pending installment agreement, not just an already approved one.^[15] Installment agreement proposals or offers in compromise must be submitted in good faith and not to solely delay collection.

The IRS regards an installment agreement request as being made for the sole purpose to delay collection activities when the taxpayer proposes a nominal monthly payment amount, like a dollar, or an amount “so small it does not come close to reflecting the taxpayer’s ability to pay.”^[16] A request is also made solely for delay when the request does not address changes that the IRS requested in response to prior requests, ignores requests of a revenue officer, where the taxpayer has defaulted on a prior installment agreement, or there is a history of noncompliance with filing returns or depositing taxes.^[17]

Offers in compromise are sought to be for the sole purpose of delay when a taxpayer submits an offer that is materially the same from a previously submitted offer that has been rejected or does not address defects that caused it to be rejected. Offers are also treated as being frivolous when the taxpayer clearly has the ability to pay the entirety of the liability based on future payments or equity in assets.^[18] Additionally, based on the discretionary exclusions, the IRS has also graciously decided not to revoke the passports of deceased taxpayers.^[19]

Reversal of Certification

The statute provides that the IRS shall send notice to the secretary of state if the certification is found to be erroneous or if the debt is fully satisfied or ceases to be a seriously delinquent tax debt by reason of the statutory exclusions noted above.^[20] While the IRS has the discretion to request decertification for reasons other than the statutory exclusions, based on the Internal Revenue Manual provisions, the IRS will decertify a tax debt when a discretionary exclusion is met.^[21] The IRS will also decertify if a taxpayer is in a combat zone, and when there is an active installment agreement or pending innocent-spouse claim, but the taxpayers transcripts were not properly coded.^[22] The IRS will decertify when the Department of State requests the IRS to decertify or when the Tax Court or a district court orders reversal.^[23]

If the entire liability is paid, the IRS will automatically decertify within 30 days. If the taxpayer files a valid return to replace a substitute return, which was used as the basis for the certification and the original filing(s) will bring the liability under the threshold amount, the IRS will also decertify. However, it will only do so after the return is processed and posted to the IRS’s record of account for the taxpayer, which could take months.^[24]

If a penalty is abated such that the entire amount certified falls below the threshold amount, the IRS will also reverse the certification.^[25] However, the first-time penalty abatement, which is IRS policy and not statutory, will not lead to a certification reversal, even if the first-time abatement brings the total liability under the threshold amount.^[26]

A collection due process hearing request for a lien or levy for tax periods that are not the basis of certification of a seriously delinquent tax debt will not cause decertification.^[27] Neither will a pending innocent-spouse claim on a noncertification tax period.^[28]

Sometimes decertification is automatic, and other times it must be manually requested through an IRS ACS call center. When in doubt, request it through an ACS call center and the IRS representative can tell you that the file is coded for decertification. The computer system will do a scan for decertification codes periodically and trigger an automated reversal letter within the 30 days. Reversal of certification letters are sent to both the secretary of state and the taxpayer.

A taxpayer can also request “expedited reversal” if three conditions are met: 1) The taxpayer is eligible for decertification based on a statutory exception or discretionary exclusion; 2) if the taxpayer states that foreign travel is scheduled within 45 days or the taxpayer lives abroad; and 3) the taxpayer has a pending application for passport or renewal and provides the passport application number and the location of the passport application.^[29] The expedited reversal provisions in the Internal Revenue Manual provide for planning opportunities depending on the taxpayer’s plans and when a practitioner is retained. It will almost always be better to wait until the taxpayer is within the 45 days of travel to request an expedited reversal than it would be for the taxpayer or representative to call the IRS within two or three weeks of that 45-day period. With the expedited decertification procedure, Form 14794 is completed and signed by a manager and then immediately and directly sent to the Department of State for action.^[30] The Internal Revenue Manual advises IRS personnel not to offer expedited decertification.^[31]

Other than fully paying the liability or availing oneself of the resolution options provided by the statutory or discretionary exclusions, there is no administrative appeal, administrative hearing, or claim process that can be filed with the IRS if the taxpayer believes that a certification is erroneous.^[32] Further, if even one of the tax periods or modules become uncollectible due to the statute of limitations on collection expiring, it will not lead to decertification even if the remaining liability is below the threshold amount, so long as the liability was collectible as of the date of certification.

Taxpayers may be able to avail themselves of the IRS Collection Appeals Program (CAP) when there are passport revocation issues present in a tax case but only in conjunction with the denial of the underlying tax liability resolution proposal. It may be quicker than a more traditional appeals request, but it will not immediately reverse certification and will still take some time. Since the passport revocation procedures are so new, it is not known if the IRS, in practice, looks at resolution proposals with more scrutiny when there is a passport certification issue.

The Department of State itself has some limited discretion under §32101(e) of the FAST Act when it receives a certification notice from the IRS. If the taxpayer has emergency or humanitarian reasons for travel, the Department of State may issue a passport in such circumstances, such as when there is risk of bodily harm to a taxpayer or a family member; or if a taxpayer is stranded in a war zone or in a country in the midst of civil unrest; or there is a need to travel to receive medical care or care for a family member.^[33] In such circumstances, the taxpayer should contact the Department of State directly to request such relief. While there is a phone number for the Department of State on the Department of State’s passport denial letter, there is no mention in that letter of what to do in emergency circumstances. An already distraught individual in those circumstances is left frantic to call the IRS or Department of State and endure long wait times only to likely be denied assistance or worse; reach an individual who is unfamiliar with the new law or procedures; or otherwise call an attorney who can hopefully assist.

Judicial Review and Ancillary Issues

The only way to challenge whether a certification was erroneous such that a taxpayer did not have a seriously delinquent tax debt, or challenge the IRS if the IRS failed to reverse a certification when it should, is to file an action in Tax Court or federal district court. Section 7345(e)(1) provides that any individual who has been certified may bring a civil action to determine whether the certification was erroneous or should have been reversed. The action may be filed in either a federal district court or the Tax Court. If the court determines that a certification was erroneous or should be reversed, it may order the IRS to notify the state department to reverse certification. After §7345 became law, the Tax Court promulgated rules for handling certification actions.^[34] To challenge a certification or failure to reverse a certification, the taxpayer must file a petition that contains not only the name, state, mailing address, and date of the petition, but also the date of the certification letter and the facts upon which the petitioner disagrees with the certification or failure to reverse the certification.^[35] Filing a §7345 suit in federal district court or Tax Court will not put a hold on IRS collection action.^[36]

There are issues that remain that are not addressed within the statute itself. Petitioners are likely to raise challenges to certification including a challenge to the underlying liability, the period of limitations for bringing an action, and the scope and standard of review.

Section 7345 does not provide an avenue for challenging the underlying liability that constitutes a seriously delinquent tax debt. Unlike other areas of the code, §7345 does not waive the government’s immunity to liability challenges. Unless there is a specific waiver of sovereign immunity granted by Congress, the U.S. cannot be sued.^[37] Furthermore, under §7421, no suit shall be maintained in any court for the purpose of restraining the assessment or collection of any tax unless a referenced code section allows it.^[38] Section 7345 is not one of the permissible sections whereby an underlying assessment can be challenged. If a substitute for return filing by the IRS is the basis for the underlying liability, then a practitioner would need to determine if the case is better off settled through resolution of the underlying liability, which would lead to decertification through use of the statutory or discretionary exclusions, or if original returns should be filed to reduce the liability, or some combination of strategy. One reason why Congress may have decided against providing an additional opportunity to challenge the underlying tax debt or provide prior notice to certification is because based on the definition of a seriously delinquent tax debt, taxpayers have the right to challenge the tax debt prior to certification. The policy behind the passport revocation provisions is to encourage a means of collection, not challenge an underlying liability.

While seriously delinquent tax debt specifically excludes nontax liabilities like criminal restitution, FBAR penalties, past-due support payments, and the Affordable Care Act penalties, the statute requires that the tax liability be assessed. Section 6020 allows the IRS to prepare and file a return on behalf of a non-filer such that the liability shown on such a return shall be considered assessed and, thus, collectible.^[39] A tax is also assessed when a taxpayer files an original return, or when an amended return is accepted, or by examination or audit.^[40] Once a tax debt is assessed, the IRS can seek collection via levy or lien. Because of due process considerations, the IRS cannot lien or levy a taxpayer without providing notice and an opportunity for a “collection due process” hearing.^[41] Depending on the circumstances, a collection due process hearing may allow a taxpayer to challenge an underlying liability and, thus, may provide an opportunity to challenge it in Tax Court based on an issued notice of determination resulting from the hearing. Since the passport revocation statute already requires that collection due process rights be expended, it does not allow a second kick of the can.

Section 7345 also does not specify a period of limitations in which a taxpayer may bring a certification action. Absent a specific statutory limitation, the general six-year period applies to these cases pursuant to 28 U.S.C. §2401(a).^[42] Individual taxpayers can bring an action to determine whether a certification was erroneous within six years from the date of the 508C passport revocation letter or six years from the date that grounds for reversal existed to challenge whether the IRS failed to reverse a certification.^[43]

Section 7345 also does not prescribe the standard of review applicable to certification actions. Based on the IRS chief counsel’s memo, the IRS takes the position that because there is no statutory standard of review dictated by the passport revocation statute and because the IRS bases its decisions on its computer records of taxpayer accounts, that the review is limited to the computer records of those tax periods and as such the standard should be whether the IRS action was “arbitrary, capricious, and abuse of discretion or otherwise not in accordance with law.”^[44] Yet, the computerized modules are often wrong because many “code” entries require human input, and even the algorithms can be wrong. Even if the algorithms correctly identify seriously delinquent taxpayers, the underlying code entries used to compute the qualifications of certification are often incorrect. The Internal Revenue Manual certification reversal provisions even factor coding errors as grounds for certification reversal in certain circumstances.^[45] The IRS has also seen systemic issues with calculating correct collections statute expirations dates (CSEDs).^[46] A wrong CSED could also lead to an improper certification. While it will ultimately be decided through litigation of these types of cases, a taxpayer should argue that §7345 cases should have a de novo standard of review and ask the court to review all issues as if presented for the first time and allow the introduction of evidence that the IRS did not consider when it either certified a seriously delinquent tax debt or failed to reverse a certification.^[47]

Even though the passport revocation statute is relatively new, it is estimated that 362,000 notices have already been sent to taxpayers in 2018.^[48] Since this provision will likely be a permanent feature of the tax code for quite some time, all will do well to be aware of its implications.

This column is submitted on behalf of the Tax Law Section, Janette M. McCurley, chair, and Taso Milonas, Charlotte A. Erdmann, and Jeanette E. Moffa, editors.