If you wrote “travel more” on your 2016 New Year’s resolutions list, you may want to make sure you’re in good standing with the IRS before you make plans to wander too far from home. In early December 2015, legislation was enacted to add section 7345 titled “Revocation or Denial of a Passport in Case of Certain Tax Delinquencies” to the Internal Revenue Code. Under this new section, the Secretary of the Treasurer will “certify” certain individuals with “seriously delinquent tax debt” to the Secretary of State. The Secretary of State will then make a determination to deny, revoke, or limit those individuals’ passports.
What Is A “Seriously Delinquent Tax Debt”?
This new law won’t affect all U.S. passport holders, just those with a seriously delinquent tax debt. A seriously delinquent tax debt is defined as an assessed federal tax liability over $50,000, including penalties and interest, and:
- The IRS has filed a notice of lien and the taxpayer’s rights have been exhausted or lapsed; or
- The IRS has filed a notice of levy.
The $50,000 threshold is a cumulative amount, not a liability for one particular year. There will be a cost-of-living inflation to the threshold amount for calendar years beginning after 2016.
An important distinction to understand is whether a tax liability has actually been assessed. An assessment means that the liability has been recorded, along with other taxpayer information, on an official IRS list. It is distinguished from an audit situation or a notice of deficiency.
An assessment doesn’t happen immediately. The IRS must first provide notice to the taxpayer that the deficiency exists and the taxpayer has certain rights to appeal or protest the deficiency within certain timeframes. Only after the appeal and protest processes have ended will an assessment be recorded. At this point, if no payment is made or agreement entered into, a lien or levy may be attached by the IRS.
Four Exceptions to the Seriously Delinquent Tax Debt Exception
Even if the taxpayer has a seriously delinquent tax debt, not all is lost. The following exceptions can prevent a taxpayer from being certified by the IRS:
- The taxpayer and the IRS have entered into an installment agreement and the payments are being made in a timely manner;
- The IRS has accepted an offer-in-compromise from the taxpayer;
- The debt has been suspended because a collection due process hearing with regard to the lien or levy has been requested or is pending; or
- The debt has been suspended under the innocent spouse rules.
How Will You Know If You Have Been Certified?
Notice of Lien or Notice of Levy
The first time a taxpayer will receive information about a notice of certification will be in their notice of lien or notice of levy. However, it may not be obvious since the statute states only that, along with other required information, the following must be included:
“the provisions of section 7345 relating to the certification of seriously delinquent tax debts and the denial, revocation, or limitation of passports of individuals with such debts pursuant to section 32101 of the FAST Act.”
These provisions will be added to all notices of lien or notices of levy, regardless of the amount assessed. It will not be a personalized notice and the notice of lien or notice of levy will not state outright that the taxpayer has been certified. It appears it will be the responsibility of the taxpayer to understand whether they are at risk of being certified based on the information included in these notices.
The second notification will be a direct notice of certification to the taxpayer. It will occur contemporaneously when the Secretary of the Treasurer sends a certification of a seriously delinquent tax debt to the Secretary of State. Notice to the taxpayer is required to include a description in simple terms of the taxpayer’s rights to bring a civil action. Taxpayers who move or travel frequently should be aware that communications from the IRS are sent to the taxpayer’s last known address.
Denial vs. Revocation of a Passport
Once a taxpayer has been certified, the Secretary of State is required to deny the taxpayer’s application and may not issue a passport. The Secretary of State may make exceptions in the cases of emergency or humanitarian situations, but, otherwise, there is little wiggle room. Also, it is not yet clear what may qualify as an emergency or a humanitarian situation as the regulations have not yet been issued.
With regard to a revocation, there is more discretion. The Secretary of State may revoke a previously issued passport, but is not required to do so. While at first glance this sounds more evenhanded, a revocation of a U.S. passport of a taxpayer traveling or living in a foreign locale may be devastating. Generally, unless the taxpayer possesses dual citizenship and holds another country’s passport, they will be considered an undocumented alien by that foreign country.
To address this situation, section 7345 provides the Secretary of State the ability to grant limited use of a passport prior to revocation. A taxpayer with a previously issued passport may be permitted to use it for return travel to the United States before revocation. Also, the Secretary of State may issue a limited passport that only permits the taxpayer to return to the United States, at which point the passport will then be revoked. This may provide relief for traveling taxpayers, but expatriates or those on overseas work assignments may have a more serious issue if their U.S. passport is revoked.
Taxpayer Rights: What If The IRS Made a Mistake Or The Certification Is Reversed?
No one is infallible and Congress seemed to recognize that the IRS could erroneously certify a taxpayer as having a seriously delinquent tax debt. Section 7345 provides the taxpayer with the right to bring civil action in Tax Court or United States District Court to determine whether the certification was erroneous or that an erroneous certification was not reversed. However, some may feel that this recourse is less than adequate compared to the costs and efforts exerted by the taxpayer to correct the error: currently, a ruling in favor of the taxpayer will only result in the court ordering the IRS to notify the Secretary of State of the error. Otherwise, the Secretary of the Treasurer, the Secretary of State and their designees will be held harmless and not liable for any action with respect to a certification.
Reversal of the Certification
A certification is not permanent. Certifications may be reversed when (1) there has been an erroneous certification, (2) the tax debt has been fully satisfied, or (3) the tax debt ceases to meet the definition of a seriously delinquent debt. In these situations, the IRS must notify the Secretary of State of the reversal of certification. It is not the responsibility of the taxpayer.
Importantly, the taxpayer needs to be aware that this notice won’t happen right away. The following timeframes have been provided for notice of a reversal:
- Full satisfaction of the tax debt – not later than the date required for issuing the release of the lien (typically 30 days).
- Innocent spouse relief – not later than 30 days after the relief has been elected or requested following the requirements of the Code.
- Installment agreement or offer-in-compromise – not later than 30 days after the agreement has been entered into or the offer accepted.
- Erroneous certification – as soon as “practicable”.
Once notice is made, the Secretary of State is directed to remove the certification from the individual’s record but no timeframe is indicated regarding how quickly this should be done.
Passport Applications with Missing, Incorrect of Invalid Social Security Numbers
While the title of this new section of the Code refers to passports with associated tax delinquencies, another scenario exists which can trigger denial or revocation of a passport. A passport may also be denied if:
- The individual’s social security account number is not included, or
- The individual willfully, intentionally, negligently or recklessly provides an incorrect or invalid social security number.
A previously issued passport can be revoked for the same reasons. The Secretary of State is permitted the same emergency and humanitarian exceptions as well as the potential to permit limited travel passports before revocation.
What Should You Do?
Section 7345 became effective the day it was enacted. While regulations and guidance have not yet been issued, taxpayers at risk of becoming certified should check their tax status and consider cleaning up any outstanding issues. Bearing in mind that reversing a certification will probably take about a month, and this is after spending time to remedy the tax debt, being proactive may be the better option. Taking the following steps may prove helpful:
- Gather any IRS notices you have received and check what they say. The devil you know is better than the one you don’t and this step can prevent a deficiency from turning into an assessment.
- If you have a deficiency notice, check if there is still time to respond. It may be possible to appeal the deficiency and negotiate the amount of tax and penalties. Interest can’t be negotiated, but it will be reduced if the tax and penalty base are decreased.
- If you have received a notice of assessment, consider contacting the IRS to discuss an installment agreement or an offer-in-compromise.
- An installment agreement allows the taxpayer to pay the tax debt on a periodic basis, usually monthly, over time. Taxpayers owing more than $50,000 will not be able to use the IRS’ Online Payment Agreement Application and will need to file Form 433F which is used to assess financial status and ability to pay.
- An offer-in compromise is a request made by the taxpayer to settle the amount of their unpaid taxes for less than the amount owed. This can be a laborious process. They are granted only under certain conditions and, typically, less than half of all requests result in an offer-in-compromise.
- Obtain copies of your IRS account transcripts.
Check the tax amounts paid and owed and ensure there are no mistakes. Confirm that existing installment agreements are in good standing; timely payments must be made in full and current tax returns must be timely filed. Non-compliance with the requirements could negate your installment agreement.
- Update Your Address with the IRS
The IRS sends notices of deficiency and notices of assessment to a taxpayer’s last known address based on their most recently filed income tax return. Generally, if the IRS sends a notice to a taxpayer’s last known address, it doesn’t matter if the taxpayer doesn’t live there anymore and didn’t receive the notice; the timeframe on the taxpayer’s rights is measured from when the IRS notice is sent. Taxpayers can update their last address using Form 8822.
The ability to travel internationally in a global economy is critical to many people’s livelihoods, not to mention the issue of maintaining family relations overseas. It is currently unclear how many taxpayers will be affected by this new IRS law but the implications for those impacted have the potential to be severe with U.S. taxpayers living overseas facing the direst complications. There is no easy or quick solution and a ‘wait-and-see’ approach is not recommended. Taking control of a seriously delinquent tax debt sooner rather than later may prove to be the best route to desired travel destinations in 2016.
Acknowledgement: With grateful appreciation to Attorneys Morris N. Robinson, CPA, LL.M. and Yechiel N. Robinson for their expert input and editing suggestions.
The material in this publication does not constitute legal advice. It is intended for general information purposes only. If legal issues arise, the reader should consult legal counsel. If you have questions or need assistance with regard to tax debts or tax controversies with the IRS, the attorneys at M. Robinson & Company may be able to assist you. Please feel free to contact us at 617-428-6900.
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