If you have a so called “seriously delinquent tax debt”, Internal Revenue Code Section 7345 authorizes the Internal Revenue Service (IRS) to certify that unfortunate fact to the State Department. The State Department generally will not issue or renew a passport to you after receiving this certification from the IRS. Upon receiving certification, the State Department may also revoke your passport. If the Department decides to revoke it, prior to revocation, the State Department may limit your passport to return travel to the US (thus preventing you from being trapped in limbo if you are outside of the US).
The IRS is moving forward with implementation of these new rules in phases. According to the IRS, enforcement will begin “in early 2017”. I understand that actual implementation begins next month. Given the seriousness of not having a passport, it appears that IRS is trying to give those at risk an opportunity to correct their tax situation before the sword drops.
According to Mary Beth Murphy, commissioner of the IRS Small Business/Self-Employed Division, the first phase will focus on denying passport renewal applications for delinquent taxpayers. In the second phase, the IRS and State Department will focus on revoking passports held by delinquent taxpayers. The IRS is rolling out the law in phases so as to lessen the chances that an individual will be stuck in a foreign country without a valid US passport.
The idea to use a passport as leverage to compel payment of taxes, has cropped up again and again in the past several years. The IRS was very aware of the potential for using the US passport as an effective means of increasing the collection of unpaid US taxes. In 2011, the Government Accountability Office (GAO) issued a report to Congress on this very matter urging it to consider legislation using the US passport as an enforcement tool. Congress followed through, passing the law in 2015. Although the law had immediate effect when it was passed, time was needed before it could be set into action due to the complexity in its implementation which requires joint action between the State Department and the IRS. Now, all systems are “go”.
NEW IRS Website Information Page
It’s quite clear that the noose is tightening and tightening very quickly. At the end of January, the IRS issued an information page on its website detailing the new rules and how they will be implemented. The page will advise when the IRS begins certifying tax debtors to the State Department. Here’s a summary:
What is a “Seriously Delinquent Tax Debt”?
A seriously delinquent tax debt is an individual’s unpaid, legally enforceable federal tax debt totaling more than $50,000 for which a:
- IRS Notice of federal tax lien has been filed and all administrative remedies under IRC § 6320 have lapsed or been exhausted or
- IRS Levy has been issued
Thus, you will not have a “seriously delinquent” tax debt simply because you know you have not filed your tax returns for a number of years and have at least $50,000 in unpaid amounts, but with respect to which the IRS has not taken any action to date. The IRS has to take one of the above specified actions (e.g., issued a levy) in order for you to have a a “seriously delinquent” tax debt.
The $50,000 dollar amount is easy to reach because it includes interest and penalties. Commencing 2017, the $50,000 amount will be adjusted annually for inflation.
Some tax debt is not included in determining seriously delinquent tax debt even if it meets the above criteria. The following are not included in determining the $50,000 threshold– tax debts:
- Being paid in a timely manner under an installment agreement entered into with the IRS
- Being paid in a timely manner under an offer in compromise accepted by the IRS or a settlement agreement entered into with the Justice Department
- For which a collection due process hearing is timely requested in connection with a levy to collect the debt
- For which collection has been suspended because a request for innocent spouse relief under IRC § 6015 has been made
Will A Grace Period be Granted by the State Department?
Before denying a passport, the State Department will hold your passport application for 90 days to allow you to:
- Resolve any erroneous IRS tax certification issues
- Make full payment of the tax debt
- Enter into a satisfactory payment alternative with the IRS
There is no grace period for resolving the debt before the State Department revokes a passport.
Taxpayer Will be Notified by IRS of the Certification to the State Department (Notice CP 508C)
The IRS is required to notify you in writing at the time the IRS certifies seriously delinquent tax debt to the State Department. Notification will be through issuance of Notice CP508C. The IRS will send written notice by regular mail to your last known address.
Make sure the IRS has your current address! It will not be possible for the IRS to contact you if it does not have a current address. If you cannot be contacted you will fall into the category of overseas taxpayers labeled “addressee unknown”. Unfortunately, many taxpayers moving abroad fall into this category when the taking of a very simple action can easily prevent it!
If you have moved overseas, make sure to notify the IRS and the relevant State tax authorities of your new contact information. The IRS has a special form, Form 8822, for notifying it of a change of address. The IRS has a special site page devoted to this topic.
IRS Reversal Of Certification – Notice CP 508R
Through Notice CP508R, the IRS will notify you and the State Department of the reversal of the 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 provide notice as soon as practicable if the certification is erroneous. The IRS will provide notice within 30 days of the date the debt is fully satisfied, becomes legally unenforceable or ceases to be seriously delinquent tax debt. So, once you’ve resolved your tax problem with the IRS, it will reverse the certification within 30 days.
Reversing Seriously Delinquent Tax Debt Status
A previously certified debt is no longer seriously delinquent when:
- You and the IRS enter into an installment agreement allowing you to pay the debt over time. So, if you can’t pay the full amount you owe, you can make alternative payment arrangements and still keep your passport.
- The IRS accepts an offer in compromise to satisfy the debt.
- The Justice Department enters into a settlement agreement to satisfy the debt.
- Collection is suspended because you request innocent spouse relief under IRC § 6015 provided the debt is the basis for the IRS certification.
- You make a timely request for a collection due process hearing in connection with a levy to collect the debt provided the debt is the basis for the IRS certification.
The IRS will not reverse the certification simply because the taxpayer pays down the debt below $50,000. However, if you recently filed your tax return for the current year and expect a refund, the IRS will apply the refund to the debt and if the refund is sufficient to satisfy your seriously delinquent tax debt, the account will be considered fully paid.
Just reducing the amount under $50,000 will not decertify the taxpayer. The key is to get into good standing – that is, individuals certified as having seriously delinquent tax debt must either pay the entire balance or set up a payment agreement with the IRS.
Payment agreements with the IRS should be examined by those who cannot pay the full amount due. One way to remove the passport restrictions could be achieved by paying the balance to under $50,000 and setting up a streamlined installment agreement for the rest (payment terms up to 72 months).
For delinquent taxpayers owing between $50,000 and $100,000, the new IRS expedited installment agreement process may help. If more than $100,000 is owed, the process permits a taxpayer to pay the balance down to under that amount to permit entry into a special 84-month payment plan. For taxpayers owing more than $100,000 or who need longer than 84 months, detailed collection information statements (See, e.g., the series in Forms 433) are required. Taxpayers must wait for the IRS to approve their installment agreement, which can take many months. This ultimately means that the passport restrictions will continue until the IRS approves the agreement and decertifies the taxpayer to the State Department on Form CP508R.
You Can Ask a Court to Review an IRS Certification
If the IRS certified your debt to the State Department, you can file suit in the US Tax Court or a US District Court to have the court determine whether the certification is erroneous or the IRS failed to reverse the certification when it was required to do so. If the court determines the certification is erroneous or should be reversed, it can order reversal of the certification.
If you need to verify whether your US passport has been cancelled or revoked, contact the State Department by calling the National Passport Information Center at 877-487-2778.
If you’re leaving in a few days for international travel and need to resolve passport issues, you should call the phone number listed on Notice CP 508C. If you already have a US passport, you can use your passport until you’re notified by the State Department that it’s taking action to revoke or limit your passport.
Time to Take Action
Given the growing trend of international tax enforcement, it is abundantly clear that US citizens who have not been tax compliant will face serious travel and passport difficulties in the near future. In addition, even those remaining Stateside will encounter problems in producing proper ID when required for domestic air travel since drivers’ licenses in certain States is not suitable under TSA rules. Compounding this problem is that people faced with a huge tax bill often feel overwhelmed and ignore it for some time, allowing the amount due to grow exponentially. Furthermore, tax penalties for Americans overseas can often be higher than for domestic taxpayers. This is due to foreign asset information reporting that typically applies more often to the US individual residing abroad who would have foreign financial assets such as interests in foreign entities or foreign financial accounts.
It’s definitely time to become tax compliant and for Americans abroad, there are various options to achieve this, including a penalty-free “Streamlined” option. You can read more here.
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