Last week, the Internal Revenue Service (“IRS”) published another friendly reminder that it was recently vested with the authority to revoke passports and deny passport applications for those with “seriously delinquent tax debts.” Within that notice, the IRS reminded taxpayers that they may not be able to obtain or renew passports if they owe federal taxes. The IRS also advised these taxpayers that they should “take prompt action to resolve their tax issues.” Potentially affected taxpayers – i.e., those with unresolved tax liabilities – should have a thorough understanding of the boundaries of I.R.C. § 7345 and IRS collection procedures before contacting the IRS.
As written about previously here, the Fixing America’s Surface Transportation Act (“FAST Act”) of 2015 mandates that the State Department deny any passport application for an individual, or revoke any previously issued passport for an individual, if the IRS certifies that the individual has a “seriously delinquent tax debt.” That means that any taxpayers owing more than $52,000 in total back taxes, penalties, and interest – and for which the period to challenge through a Collection Due Process hearing has expired – could be subject to certification. (A certification is simply the process whereby the IRS notifies the State Department that a taxpayer has a “seriously delinquent tax debt” and should have their passport status denied.) While taxpayers are informed of this potentially significant process on various collection notices, the consequences of certification may not become obvious until a taxpayer receives a Notice CP508C from the IRS or receives notification from the State Department.
Fortunately, taxpayers with significant tax debts have many opportunities to address these issues before their account is “certified” by the IRS. Generally, if a taxpayer is taking affirmative good faith efforts to address the liabilities through an installment agreement or Offer in Compromise, the account will not be certified. Moreover, taxpayers can seek to address the situation through Collection Due Process proceedings. Or, taxpayers can choose to pay the aggregate balance below $52,000. For taxpayers with significant and/or mounting tax liabilities, there are many defensive collection procedures that may be used to delay or avoid certification.
On the other hand, if a taxpayer is only addressing the issue after they have been certified to the State Department by the IRS, there are still options; however, a taxpayer cannot simply pay the balance below the threshold (as they might be able to pre-certification). Generally, in order to be de-certified, the outstanding balance must be paid in full or the taxpayer and the IRS must agree to an installment agreement or Offer in Compromise. Importantly, while a pending installment agreement or Offer in Compromise will likely prevent certification on the front end, only a finalized collection alternative will result in de-certification on the back end. In certain situations, taxpayers may want to pay the balance below $50,000 in order to qualify for the streamlined provisions offered by the IRS for installment agreements. This will frequently be much quicker than providing detailed financial information to the IRS and having the terms evaluated by collections personnel. (In turn, it may be used to expedite de-certification.) Moreover, taxpayers who have already been certified should carefully consider their ability to meet the likely conditions of an Offer in Compromise or an installment agreement. Certain proposals may take considerable time to finalize and may result in providing collection sources to the IRS while not ultimately ending in a timely de-certification. Even once a collection alternative is finalized, the certification reversal process may take months.
It has yet to be proven whether I.R.C. § 7345 will be an effective systemic collection tool for the IRS. Still, its effects will undoubtedly cause problems for at least a few unsuspecting taxpayers. With a proper understanding of I.R.C. § 7345, available collection alternatives, and collection appeal rights, the potential effect of this law can be mitigated for taxpayers with significant outstanding tax liabilities.