In January 2018, the IRS published procedures to begin enforcement of Internal Revenue Code (IRC) section 7345, which requires the State Department to deny the application for, or revoke the passport of, any individual whom the IRS certifies as having a “seriously delinquent tax debt.” IRC section 7345 was enacted on December 5, 2015, as part of the Fixing America’s Surface Transportation Act (FAST Act).
Prior to January 2018, the IRS had not been enforcing IRC section 7345, and there were many questions about how the passport revocation/denial process would work, such as whether there would be any additional exceptions, how the IRS would exercise its discretion, and how the IRS would interact with the State Department. Recently, the IRS has answered many of these questions through the issuance of Notice 2018-01 (Jan. 16, 2018), new Internal Revenue Manual (IRM) provisions, and updates on its website.
Now that the IRS has procedures in place to enforce IRC section 7345, it is important for CPAs to advise individual clients about this new and very serious consequence to being noncompliant with their tax liabilities. Below is a description of the provisions of IRC section 7345 and the IRS guidance, followed by answers to common questions that affected individuals may have.
General Provisions for Certification
IRC section 7345(a) states that “if the Secretary receives certification by the Commissioner of Internal Revenue that an individual has a seriously delinquent tax debt, the Secretary shall submit such certification to the State Department for action with respect to denial, revocation, or limitation of a passport pursuant to section 32101 of the FAST Act.” The key term is “seriously delinquent tax debt,” which is an unpaid, legally enforceable federal tax liability of an individual that—
- has been assessed;
- is greater than $50,000; and
- for which a notice of lien has been filed under IRC section 6323, and the taxpayer’s administrative rights under IRC section 6320 (notice and opportunity for hearing upon filing of notice of lien) with respect to such filing have been exhausted or have lapsed, or for which a levy is made under IRC section 6331 [IRC section 7345(b)(1)(A)-(C); Chief Counsel Notice 2018-005].
The “greater than $50,000” amount is adjusted for inflation for each calendar year after 2016 [IRC section 7345(f); IRM para. 18.104.22.168(2)]; accordingly, IRS guidance issued in 2018 states that a seriously delinquent tax debt is an amount greater than $51,000. The IRS computes the seriously delinquent tax debt by aggregating the total amount of all current tax liabilities for all taxable years and periods meeting the criteria described above, including interest and penalties (Notice 2018-01). Any tax penalty, including preparer penalties, can form the basis of a seriously delinquent tax debt. Nontax liabilities, such as assessments under the Affordable Care Act, employer shared responsibility payments, and penalties for failure to file reports of foreign bank accounts (FBAR), are not included (IRM para. 22.214.171.124.2).
Exceptions to Certification
There are several exceptions to the classification of a tax debt as seriously delinquent; some of these exceptions are contained in IRC section 7345 itself, and some have been created by the IRS, which has broad discretion to craft additional exceptions. The statutory exceptions are as follows:
- A debt that is being paid in a timely manner pursuant to which the individual is party under IRC sections 6159 or 7122 (i.e., an installment payment agreement or offer in compromise)
- A debt where collection has been suspended because a request for a collection due process hearing under IRC section 6330 has been requested or is pending [IRM para. 126.96.36.199(3)]. Note that the request for an equivalency hearing under Treasury Regulations section 301.6330-1(i) is not one of the discretionary exceptions.
- A debt where collection has been suspended because an election for innocent spouse relief under IRC section 6015 has been requested or is pending [IRC section 7345(b)(2)].
In addition, certification will be postponed while an individual is in active military service in an area designated as combat zone or participating in a contingency operation [IRC section 7508(a)(3); Notice 2018-01].
There are several discretionary exceptions, which the IRS could later modify, eliminate, or add to. Currently, the following are discretionary exceptions:
- The debt is currently not collectible due to hardship.
- The debt resulted from identity theft.
- The debt is a result of a criminal restitution assessment.
- The taxpayer is in bankruptcy.
- The taxpayer’s application for an installment payment agreement or offer in compromise is pending.
- The taxpayer is deceased [Internal Revenue Manual, para. 188.8.131.52(5)].
A taxpayer who is seeking assistance from the Taxpayer Advocate Service (TAS) will not be excepted from certification. The Taxpayer Advocate requested that the IRS include taxpayers who have sought assistance from the TAS to resolve their tax debts in the discretionary exceptions to certification. The IRS agreed not to certify 750 taxpayers with extant Taxpayer Assistance Orders but did not agree to exempt future taxpayers applying for TAS assistance.
As noted above, one of the exceptions to certification applies if the taxpayer’s request for an installment agreement or offer in compromise is pending; however, the IRS may still certify these tax debts, as this exception will not apply if the installment agreement request or offer in compromise was not made in good faith, but solely to delay collection (IRM para. 184.108.40.206.4).
For installment payment agreements, the IRS regards a request as being made solely to delay collection where the taxpayer proposes a nominal monthly payment (e.g., $1) or an amount “so small that it does not come close to reflecting the taxpayer’s ability to pay.” The IRS also treats requests as being made solely to delay collection if the request does not address changes requested by the IRS in response to a prior denial or ignores directions from the revenue officer, or if the taxpayer has previously defaulted on a prior installment agreement, the taxpayer’s ability to pay has not changed since the default, and the taxpayer has a history of noncompliance with filing requirements and deposit obligations, such as payroll withholding (IRM para. 220.127.116.11).
The IRS regards an offer in compromise as being made solely to delay collection where the taxpayer submits an offer that is not materially different from an offer that has previously been rejected or that does not address the defects that caused the prior offer to be rejected. In addition, offers are treated as being filed solely to delay collection where they are clearly frivolous, such as for less than the taxpayer’s equity in investments or the ability to make future payments [IRM para. 18.104.22.168].
The IRS has broad discretion to certify a seriously delinquent tax debt, even when the taxpayer has made a request for an installment agreement or an offer in compromise. Therefore, it is crucial for tax advisors to make sure that any requests are reasonable and address any defects that resulted in previous denials.
Notice of certification
The IRS must provide contemporaneous notice of the certification of a seriously delinquent tax debt to the taxpayer by regular mail [IRC section 7345(d)]. The notice must include a description of the taxpayer’s right to judicial review “in simple and nontechnical terms,” as well as information about the application of IRC section 7345 [IRC sections 6320(a)(3)(E), 6331(d)(4)(G)].
No other notice is required, and specifically, no advance notice prior to certification is required. As explained by the TAS:
The IRS does not send a stand-alone notice prior to certification and there is no holding period—once the IRS sends the certification notice to the taxpayer, passport denial can occur at any time because the certification is sent to the Department of State at the same time. Thus, the IRS does not provide a meaningful opportunity to contest the certification before it occurs (2017 Annual Report to Congress, p. 77).
Because there may be only one notice, individuals who owe the IRS, as well as their tax advisors, should pay attention to IRS notices to make sure that this crucial notification is not missed.
Procedures after Certification
After the IRS certifies the taxpayer, the information will be sent to the State Department to take action. When a certified taxpayer then applies for a passport, the State Department will provide the taxpayer with 90 days to resolve the tax delinquency by paying in full, entering into an installment agreement, or obtaining IRS acceptance of an offer in compromise before denying the application. If a taxpayer needs the passport to travel within those 90 days, the taxpayer must resolve the matter within 45 days from the date of the application so that the IRS has adequate time to notify the State Department.
The TAS has noted that is difficult to imagine taxpayers will be able to resolve the tax liability within these limited time frames (2017 Annual Report to Congress, pp. 73, 80). The TAS’s statistics for resolving cases shows that the average collection case is open for 88 days, from receipt to completion of all necessary actions.
The IRS will not expedite the handling of a taxpayer’s request for installment payment agreement or offer in compromise in order to avoid passport action, even if the taxpayer is traveling out of the country in a short period of time [IRM para. 22.214.171.124(6)]. The IRS generally handles requests for installment payment agreements and offers in compromise on a first-in, first-out basis; it will expedite handling at the request of the taxpayer in certain situations, such as where there is a contract or business agreement requiring the taxpayer to resolve the tax liability by a specific date, money to fund the offer is only available for a limited time, or the taxpayer is terminally ill [IRM paras. 126.96.36.199(5); 188.8.131.52, 184.108.40.206]. A mere wish to avoid certification, however, is not one of these circumstances.
Reversal of Certification
IRC section 7345 contains procedures for the reversal or decertification of the certification of a seriously delinquent tax debt. The IRS must notify the State Department if the certification is determined to be erroneous, if the taxpayer has paid the debt in full (not just a partial payment to reduce the liability below the threshold), or if the debt ceases to be a seriously delinquent tax debt under any of the statutory or discretionary exceptions [IRC section 7345(c)(1); Chief Counsel Notice 2018-005].
Although the taxpayer is required to pay the entire amount certified before the IRS will reverse the certification, the IRS will decertify the liability if it is reduced below the threshold for certification for other reasons. For example, reduction in tax due to the filing of a valid return or amended return will cause decertification, but only after the return is processed and posted (IRM para. 220.127.116.11.8).
If the IRS abates the penalty so that the liability is below the threshold for certification, the taxpayer also may be eligible for decertification (IRM para. 18.104.22.168.8); however, not all penalty abatements will result in decertification. For example, penalty abatement under the first-time abatement policy does not result in decertification, even if the adjusted liability is below the threshold amount (IRM para. 22.214.171.124.8).
The taxpayer can request expedited decertification when all of the following conditions apply:
- The taxpayer is eligible for decertification.
- The taxpayer states that his foreign travel is scheduled within 45 days or less, or the taxpayer lives abroad.
- The taxpayer has a pending application for passport or renewal and provides his passport application number and, if the taxpayer applied outside the United States, location of passport application (IRM para. 126.96.36.199.19.9.1).
Note that taxpayers with travel plans scheduled for more than 45 days in the future do not qualify for expedited decertification.
There may be situations in which a taxpayer residing outside of the United States has an urgent need for a passport without having imminent travel plans. The IRS will give expedited consideration to taxpayers who report that they have an urgent need for decertification and meet the other requirements. Other than the exceptions discussed above, however, the only other potential exception is that the State Department may issue a passport “in emergency circumstances or for humanitarian reasons” [22 U.S.C. section 2714a(e)(1)(B)].
The IRS is required to send notice of the reversal of the certification to the taxpayer [IRC section 7345(d)]. The timing of the notice of the reversal depends on the reason for it. If the reversal occurs because the tax debt is fully paid or legally unenforceable, the IRS is not required to make the notification until the date required for issuing a certificate of release of the lien under IRC section 6325(a) [IRC section 7345(c) (2)(A)]. If the reversal is because the taxpayer has elected or requested innocent spouse relief, or because the taxpayer has entered into an installment agreement or an offer in compromise, the notification must be made within 30 days after the election or request [IRC section 7345(c)(2)(B)–(C)]. If the certification was erroneous, the IRS must send the notification “as soon as practicable” after it makes the finding [IRC section 7345(c)(2)(D)].
Tax professionals should be aware that the IRS will not systematically issue decertifications in all situations, and some will have to be done manually. In these situations, one should monitor the decertification to make sure that it is handled in a timely fashion. Situations where systematic decertification does occur include those where the taxpayer pays the tax debt; the statute of limitations for collection expires; the taxpayer is in not collectible status; the taxpayer’s offer in compromise has been accepted and is being timely paid; an amended return, penalty abatement request, or audit reconsideration eliminates the balance due; the tax debt is due to identity theft; there is a disaster zone freeze; or the taxpayer is in bankruptcy [Memorandum for Taxpayer Advocate Service Employees, TAS-13-0418-0001 (April 26, 2018), Appendix A]. Situations which will require manual certification include amended returns and penalty abatement (other than first time abatement) that reduce the total unpaid assessments below the threshold for certification, and situations where the certification was erroneous and correction of the error does not result in systemic posting of the decertification.
Judicial Review of Certification or Failure to Reverse a Certification
IRC section 7345 provides for judicial review of the IRS’s certification, but not before it takes effect. The taxpayer may bring a civil action in U.S. District Court or the Tax Court to determine whether the certification was erroneous or whether the IRS has improperly failed to reverse the certification [IRC section 7345(d)]. Other than calling the IRS at the phone number in the notice of certification to request reversal, the only procedure for review of the IRS’s action is to file a civil action in court under section 7345(e); the taxpayer may not challenge the certification through an appeal to the IRS (Notice 2018-01).
The Tax Court is developing new Rules of Practice and Procedure for certification actions, and the IRS has stated that a taxpayer has six years from the issuance of the certification to bring an action (Chief Counsel Notice 2018-005). The IRS’s view is that the court’s review will be confined to the administrative record and that the standard of review is whether the IRS’s action was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” [Chief Counsel Notice 2018-005, citing 5 U.S.C. section 706(2)(a)]. There is no administrative exhaustion requirement, and thus the taxpayer is not required to file an administrative claim or otherwise contact the IRS before filing suit in the Tax Court or U.S. District Court.
The IRS’s position is that the taxpayer cannot challenge the underlying liability; however, the statute itself contains no such limitation, and there is no legislative history to that effect. IRC section 7345(e)(2) merely states that “the taxpayer may be bring a civil action against the United States … to determine whether the certification was erroneous or whether the Commissioner has failed to reverse the certification.” It remains to be seen whether the courts will agree, particularly where only “legally enforceable” tax liabilities can be the basis for certification and significant constitutional rights are implicated. As noted by the Taxpayer Advocate, IRC section 7345 and the IRS’s enforcement of it could unconstitutionally deprive citizens of the fundamental right to travel, protected by the due process clause of the U.S. Constitution [Memorandum for Taxpayer Advocate Service Employees, p. 1].
Other Frequently Asked Questions
Will the IRS really send notification to the State Department for all seriously delinquent tax debts, or will it only focus on the really serious offenders? Time will tell, but the IRS has established internal procedures to systematically upload information for cases to be certified [IRM para. 188.8.131.52(4)], and certifications will be provided systematically to the State Department on a weekly basis (IRM para. 184.108.40.206.6). CPAs should advise all individuals with tax debts of over $51,000, or any who are expecting an assessment of that amount or more in the future, about the passport denial and revocation procedures so that they have an opportunity to comply before any action is taken. TAS has estimated that there are 270,000 taxpayers who meet the criteria for a seriously delinquent tax debt and do not meet one of the exceptions (2017 Annual Report to Congress, p. 73).
Can the IRS go back to years that would otherwise be uncollectible because the statute of limitations for collection has expired? No. IRC section 7345 refers to a “legally enforceable” liability. A liability that the IRS can no longer collect because of the application of IRC section 6502 is not legally enforceable.
After the IRS has issued the certification, can passport revocation or denial be avoided by making a payment to reduce the debt to below $51,000? No. For reversal of certification, the debt must be paid in full, not just paid below $51,000 (IRM para. 220.127.116.11.2; “Revocation or Denial of Passport in case of Certain Unpaid Taxes,” http://bit.ly/2tqvSm4).
What does “seriously delinquent tax debt” cover? Does it include FBAR penalties or state and local taxes? The liability must be the federal tax liability of an individual; accordingly, state and local taxes will not give rise to passport action. In addition, IRS assessments that fall outside of the IRC—such as FBAR penalties, which are assessed under Title 31, the Bank Secrecy Act—cannot be the basis for passport action (Chief Counsel Notice 2018-005).
What about penalties and interest? Are they included in reaching the $51,000 or is that number just the amount of the tax liability itself?The total amount due to the IRS for the federal tax liability of an individual, including tax penalties and interest, is included in the $51,000 (Notice 2018-01; “Revocation or Denial of Passport in case of Certain Unpaid Taxes”).
What about trust fund recovery penalties? Yes. Although these penalties may begin as the liability of a business and not an individual, once assessed under IRC section 6672, these liabilities are the debts of the responsible individual and can be the basis for a seriously delinquent tax debt.
Will new delinquencies be added to the seriously delinquent tax debt after certification? It depends. If the taxpayer’s account was previously certified and the taxpayer incurs an additional liability, and the total liability meets the threshold for certification, the aggregate assessed balance will recalculated to include the new liability (e.g., IRM para. 18.104.22.168.1). If the total amount is under the threshold, the new amount will not be included.
Does action under IRC section 7345 or the filing of an action for judicial review of the certification of a seriously delinquent tax debt require the IRS to suspend collection? No. The IRS can, and likely will, continue with enforced collection action against the taxpayer, as IRC section 7345 does not stop collection [IRM para. 22.214.171.124.5(2)].
How can the IRS share tax information with the State Department without violating the taxpayer privacy provisions of IRC section 6103? Other statutes have been amended to facilitate the enforcement of IRC section 7345, including IRC section 6103. IRC section 6103 now permits the IRS to provide information to the State Department regarding the taxpayer’s identity and the amount of the seriously delinquent tax debt [IRC section 6103(k)(11)]. Officers and employees of the State Department can only use this information for purposes of carrying out IRC section 7345, and not for any other purpose.
What happens if an individual’s passport is revoked while traveling? How will she get home?The certification of a seriously delinquent tax debt will not prevent return travel to the United States. The State Department can issue passports for direct return to the United States for individuals whom the IRS has certified as having a seriously delinquent tax debt [22 U.S.C. section 2714a(e)(2)(B); 22 C.F.R. section 51.60(a)(3)].