On December 4, 2015, President Obama signed the Fixing America’s Surface Transportation Act (FAST). Section 32101 of FAST adds section 7345 to the Internal Revenue Code (IRC), requiring the Secretary of State to deny, revoke, or limit the passport of any individual with a “seriously delinquent tax debt.” The IRC defines this as an assessed, unpaid, legally enforceable federal tax liability that is greater than $50,000 and where the IRS has filed a notice of lien or a notice of levy. This includes interest and penalties, so individuals with lower tax deficiencies may also be affected. Pursuant to section 7345(f), the threshold will be adjusted annually for inflation.
Prior IRS Travel Restrictions
Prior to FAST, the government had a heavy burden to show extraordinary circumstances in order to restrain an individual’s right to travel. The IRS had to demonstrate that—
- the individual owed a significant tax liability,
- the individual had the ability to pay,
- the individual chose to place both himself and his assets outside the reach of the United States, and
- the issuance of such court order would serve the public interest.
The resulting court order, known as a writ of ne exeat republica (writ), commands the U.S. marshals to restrain an individual from leaving the United States and to bring them to a U.S. magistrate judge to either surrender all passports and international travel documents or post a cash bond equal to the lesser of their assessed unpaid federal tax liability or the value of the net equity in their worldwide assets. Generally, the writ would only be issued in cases where an individual owed a large tax debt.
Certification and Denial of Passports under FAST
Under the new law, the IRS Commissioner will provide the Secretary of the Treasury with certification of the identity of persons with seriously delinquent tax debt, which is then sent to the State Department. IRC section 6103(k)(11) was amended by FAST, and information transmitted to the Department is limited to an individual’s identity and the amount of the seriously delinquent tax debt.
This new rule does not apply to the following situations:
- An individual making timely payments under an agreement with the IRS under IRC sections 6159 or 7122;
- An individual contesting a tax bill administratively, either with the IRS or in court;
- An individual serving in a combat zone or contingency operation, as defined by section 7508;
- Where collection is suspended due to a collection due process hearing under section 6330; or
- Where innocent spouse relief has been requested or is pending under section 6015.
An individual whose name appears on the certification list will not be issued a passport, except in emergency circumstances or for humanitarian reasons, at the Department’s discretion. The Department may also revoke an individual’s previously issued passport, limit a previously issued passport for return travel to the United States, or issue a limited passport that would only permit return travel to the United States.
When an individual’s debt is either satisfied or no longer seriously delinquent by section 7345 standards, or if the certification is determined to be in error, the IRS must notify the Department, which will remove the certification from the individual’s record. An individual can remove a debt from seriously delinquent status by either obtaining innocent spouse relief or entering into an installment agreement or offer in compromise.
When the IRS files notice of a federal tax lien or notifies an individual of its intention to levy, the notice must now include information regarding section 7345 certification of seriously delinquent taxpayers and the government’s ability to deny, revoke or limit passports. The IRS is also required to simultaneously notify the individual when it transmits certification to the Treasury or reversal of certification to the Department. The notice must include, in simple and nontechnical terms, the individual’s right to bring a civil action.
Once an individual receives a notification, she may bring a civil action against the United States in either U.S. District Court or Tax Court. If the court finds that the certification was either erroneous or the IRS failed to properly reverse the certification, the court may order the IRS to notify the Department.
While this new provision will only affect some individuals, it does induce those with tax debt to manage their delinquent tax notices. CPAs should notify their clients of the new law and advise them to deal with their tax debts before the IRS begins a collection action.