IRS & Passport Issues

In 2016, I wrote, “Owe the IRS $50,000 in Back Taxes Lose Your Passport.” I believe it is now time to revisit the topic: IRS Passport Revocation. Why the update? First, the amount is no longer $50,000 but $52,000 (as the amount has been adjusted for inflation). Second, the IRS Office of Chief Counsel subsequently issued guidance: Passport Actions Under Section 7345 (CC-2018-005). Third, enough time has passed to see how the Internal Revenue Service and the State Department will administer IRC §7345.

Background

In December of 2015, §7345 was added to the Internal Revenue Code. Under the new law, the IRS would “certify” taxpayers that owe “seriously delinquent tax debt” to the U.S. Secretary of State for action including passport denial, revocation, or limitation.  Seriously delinquent tax debt is an unpaid, legally enforceable federal tax liability owed by an individual, in excess of $50,000 (adjusted for inflation), which has been assessed, and a notice of federal tax lien has been filed, with all administrative rights being exhausted or a tax levy issued.

NOTE: the $50,000 threshold amount includes interest and penalty.

Statutory Exceptions: §7345(b)(2) includes exceptions that a tax debt being paid via an IRS agreement (i.e. an Installment Agreement, or an Offer in Compromise) will not be considered “seriously delinquent tax debt.” Additionally, if collection is suspended for the tax debt at issue (i.e. taxpayer requested either a CDP hearing or Innocent-Spouse Relief) then the taxpayer will not be subject to certification.

Administrative Exclusions: Additionally, the IRS has the discretion to exclude categories of tax debt from certification even if the debt meets the criteria of seriously delinquent tax debt under §7345.  The following tax debts are administratively excluded from certification: 

  • Debt that is determined to be currently not collectible (CNC) due to hardship
  • Debt that resulted from identity theft
  • Taxpayers in a Disaster Zone
  • Debt of a taxpayer in bankruptcy
  • Debt of a deceased taxpayer
  • Debt that is included in a pending Offer in Compromise
  • Debt that is included in a pending Installment Agreement 

Current State Department Passport Revocation Policy

The State Department has chosen NOT to revoke passports of taxpayers that have been certified.  Instead, the State Department will not issue or renew a passport to a certified individual.  Keep in mind that the State Department is authorized and within its power to revoke previously issued passports belonging to certified individuals. However, the State Department is content (for now) simply not issuing or renewing passports to these individuals. 

Interpretation: I believe this is a good policy as revoking passports would be very unpopular.  Alternatively, a U.S. Passport is valid for 10 years from the date issued before expiring and needing to be renewed.  At this time a certified individual applying for or renewing a passport will be forced to deal with his or her outstanding taxes.

The IRS Certification Process

According to IRS Chief Counsel Notice CC-2018-055 the service will rely on automated systems (computers) to identify taxpayers with unpaid assessed tax liability that is not statutorily excepted or administratively excluded from certification.

The SBSE Commissioner will certify that these identified individuals each have a seriously delinquent tax debt.  The IRS will submit newly certified individuals to the State Department and will notify individuals by mail of certification.

Notice CP508C will be mailed regular mail informing the taxpayer in writing that they have been certified to the State Department as having seriously delinquent tax debt; and if taxpayer applies for a passport or passport renewal, the State Department will deny application or renewal.

IRS Notice CP508C

If you receive a CP508C notice you should carefully review the notice to determine the tax assessed is correct and falls into the seriously delinquent tax debt category (i.e. not statutory or administratively exempted). If the tax is not in dispute you should take steps to resolve the tax debt by paying the amount in full (if possible) or entering into an alternative payment arrangement with the IRS. Once done, the IRS will reverse the certification, notify the State Department, and mail Notice CP508R to the taxpayer.

Conclusion

Passport Revocation is an effective tool to get taxpayers with outstanding tax liabilities to enter into Installment Agreements. Similarly, New York State has been very successful in collecting unpaid taxes by suspending driver licenses of taxpayers that owe $10,000 or more in back taxes. I am confident in saying the IRS Passport & NYS Driver’s License Suspension Program is here to stay.  Why?  Because they are extremely effective.