Under the new Section 7345 of the Internal Revenue Code coming into effect in January 2018, Congress has given the IRS the power to “certify” the names of delinquent taxpayers to the State Department for purposes of denying any open application for a passport and barring any foreign travel. Those taxpayers already on foreign travel at the time of that certification will have their passports revoked, and be issued a limited validity passport only permitting their direct return to the United States.
The IRS has not yet issued a revenue procedure, but here’s how the IRS describes the process. Once a taxpayer has a tax, penalty and/or interest balance that exceeds $50,000, and provided that the IRS had previously issued a lien or levy, the IRS can certify that taxpayer to the State Department for purposes of denying that taxpayer the right to leave the country. The State Department will wait 90 days from that certification in order for a taxpayer to either resolve any erroneous certification issues, make full payment of the tax debt, or enter into a satisfactory payment alternative with the IRS. If one of those three events does not occur in that timeframe, if that taxpayer had a pending passport application the State Department will deny it. If that taxpayer’s passport has already been issued, the State Department will revoke it. If that taxpayer was already on foreign travel, the taxpayer may be issued a “limited validity” passport only permitting his or her direct return to the United States. Once the tax issue is resolved with the IRS, the IRS will reverse the certification within 30 days and notify the State Department as soon as practicable. If the taxpayer files for judicial review of the certification in federal district court or Tax Court, the relevant court may only determine if the certification was erroneous or if the IRS failed to timely reverse the certification.
It is important to note that Section 7345 imposes a very significant, radical, and concerning change in U.S. tax collection enforcement measures, because it sidesteps two centuries of established law and constitutional procedure governing this exact area. During the last 200 years of U.S. legal history, the doctrine of ne exeat republica has been (and to this day continues to be) a method by which claimants including the federal government could prevent a debtor from leaving the United States, by obtaining what is called a writ of ne exeat republica. See, e.g., McKenzie et al v. Cowing, 4 Cranch CC 479 (1834). (Ne exeat republica may be loosely translated to “he shall not depart the country.) Section 7402 of the Internal Revenue Code expressly provides that federal district courts may issue such writs in tax cases, and for many years that specific provision was used to bar taxpayers from leaving the country.
Under that long established law, a debtor was required to be given sufficient due process in a federal district court before such writ could be granted. See, e.g., Kent v. Dulles, 357 U.S. 116, 126 (1958) (in which our Supreme Court noted that such right to process has existed as far back in written history as the Magna Carta, and was deeply engrained in the writing of our own Constitution). The historical procedure has always been that the claiming party first had to convince a federal district court judge that such remedy was necessary and appropriate under the circumstances, by establishing that the debtor planned to quickly depart the United States, that the debtor owes a specific amount that the debtor could pay, and that the debtor has sufficient foreign assets but insufficient domestic assets to pay the claim. See, e.g., United States v. Clough, No. C-73-2105-SW, 1977 WL 1196, at *3 (N.D. Cal. May 20, 1977). Each time, the federal district court balanced the request against the required showing, and the lineage of case decisions over the years show that the claimants (including the IRS) have won some efforts, and lost others. But importantly, in the last 200 years of such litigation, the burden has always been upon the claimant--and such burden of proof--has always been high, because in this land of the free and the home of the brave, the right to freely travel abroad is treated by our Supreme Court as a fundamental constitutional right. See Aptheker v. Secretary of State, 378 U.S. 500, 517 (1964) (finding that “freedom of travel is a constitutional liberty closely related to rights of free speech and association”).
But no more. With Section 7345, Congress has side stepped that constitutional right. Without having to prove to a federal district court that a taxpayer plans to quickly depart the United States, that the taxpayer owes a specific amount that the debtor could pay, and that the taxpayer has sufficient foreign assets but insufficient domestic assets to pay the claim, Section 7345 gives the IRS the power to certify a taxpayer to the State Department and bar a taxpayer’s foreign travel only for the reason that the taxpayer’s total tax, penalty and interest exceeds $50,000, so long as a federal tax lien or levy had previously been issued. (Graciously, in calculating that amount the IRS does not count that portion of tax that may have already been paid under an installment agreement, an offer in compromise, or a settlement agreement with the Department of Justice, or during the pendency of a Section 6330 collections due process hearing, or where an application for innocent spouse relief had been requested as to those taxes.) Further troubling is that the scope of the judicial review provided under Section 7345(e) stays within Section 7345, and never considers the burden requirements long required for this exact same taking under Section 7402. Under the Section 7345 judicial review, the reviewing court may only consider whether the taxpayer’s total tax, penalty and interest exceeds $50,000, whether a federal tax lien or levy had previously been issued, and if the matter is the timeliness of decertification, whether that had been timely done.
The IRS may argue that a taxpayer still has an equivalent amount of procedure. Don’t believe it. In short, the IRS no longer has to roll the dice before a federal district court judge. The IRS never has to meet the Section 7402 burden, and the court never is allowed to consider those factors. Congress has instead reduced the three-part test of Section 7402 to effectively just a one-part test under Section 7345: does the taxpayer owe more than $50,000? In doing so, it is evident that Congress designed Section 7345 as nothing more than an inward-facing wall of governmental coercion to pay what the Government claims is due. That taking of a taxpayer’s fundamental right to travel under Section 7345 is constitutionally suspect because it does not require the balancing required under its parallel Section 7402, prior to the government’s taking of that right.
The IRS will argue that the taxpayer can simply pay the amount that is due. As noted above, upon certification the State Department will hold off on denying a passport application or revoking an issued passport for 90 days, to “allow” a taxpayer to “resolve any erroneous certification issues, make full payment of the tax debt, [or] enter into a satisfactory payment alternative with the IRS.” For taxpayers with agreed balances but an inability to pay, that is not a simple prospect, because those with balances over $50,000 cannot enter into an online installment agreement. Instead, they would have to file on paper. For taxpayers that dispute the purported balance owed, the inequities only rise. Only tax debts included in an accepted installment agreement or offer in compromise are excluded from the delinquent tax debt. It is not uncommon for installment agreements or offers in compromise to linger with the IRS for months or even years before reaching a decision. Those taxpayers will be out of luck for the time it takes the IRS to slowly chew its cud.
In addition, the triggering balance amount of $50,000.01 is simply too low. Although under Section 7345(f) the triggering amount is indexed for inflation, $50,000.01 is not a lot of money these days, especially considering that the triggering amount includes not just tax owed, but also interest and penalties (interestingly, Section 7345 does not clarify whether only assessed interest and penalty are included or whether accrued but not assessed interest and penalty is included). That low dollar amount will pull in large numbers of otherwise low-dollar taxpayers who have valid reasons to travel and no impetus to permanently escape such debts. And note that for clients who have been certified to the State Department, paying the owed balance below $50,000 is not cause for reversing that previously-made certification.
The IRS states that once a taxpayer has resolved their tax problem with the IRS, the IRS will reverse the certification within 30 days of resolution of the problem “and provide notification to the State Department as soon as practicable.” There is no actual, reliable and accountable mechanism to cause the IRS to timely notify the State Department of a reversal, and to cause the State Department to timely issue a passport or reverse a passport revocation. While a taxpayer may file a judicial action to force the IRS to notify the State Department of an erroneous certification, the State Department is not subject to suit under Section 7345, and the federal district court or Tax Court cannot order the State Department to do anything, or even to award monetary damages in an erroneous certification (or late release of certification) matter. Thus, there is no remedy for a taxpayer who has been certified (erroneously or not) by the IRS but not timely reversed by the State Department. None of this process appears thought out, and all of this process smacks of the heavy hand of injustice.
The constitutionality of Section 7345 has not yet been litigated in a court of law. Indeed, the IRS is still simply stating that they will begin the certification process “later this year.” Practitioners seeking to argue the unconstitutionality of Section 7345 should sharpen their focus upon the United States Supreme Court analyses of the fundamental right to travel, and the long lineage of cases in the federal district courts discussing the burden placed upon a claimant seeking to bar a debtor from foreign travel. The well-established precedent, codified by Section 7402, has established that Congress cannot take a Constitutional right from a taxpayer by a method inconsistent with the process behind takings by ne exeat republica by simply writing a new law. Both Section 7402 and 7345 seek the same result; only one evades 200 years of U.S. precedent.