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IRS Gears Up to Report Unpaid Taxes to State Dept; Revocation or Denial of Passports Could Result

(Parker Tax Publishing March 2017)

The IRS announced that it will begin certifying seriously delinquent tax debts to the State Department in early 2017. As a result, any taxpayer such a debt could have his or her passport revoked or the State Department could refuse to issue or renew a passport to that individual. IRS Website.

On December 4, 2015, the Fixing America's Surface Transportation Act (the Act) was enacted into law. The Act added Code Sec. 7345, which allows for the revocation or denial of a passport where a taxpayer has a seriously delinquent tax debt. Under the provisions of Code Sec. 7345, the IRS is authorized to certify to the State Department that an individual has a seriously delinquent tax debt in which case the State Department may revoke or refuse to issue or renew a passport to that individual.

While the IRS has not yet started certifying tax debts to the State Department, it recently announced that it will begin making such certifications in early 2017.

Seriously Delinquent Tax Debt

Seriously delinquent tax debt is defined in Code Sec. 7345(b) as an individual's unpaid, legally enforceable federal tax debt totaling more than $50,000 (including interest and penalties) for which a:

(1) a notice of federal tax lien has been filed under Code Sec. 6323 and all administrative remedies under Code Sec. 6320 have lapsed or been exhausted; or

(2) a levy has been issued under Code Sec. 6331.

Some tax debt is not included in determining if a taxpayer has a seriously delinquent tax debt, even if it meets the above criteria. Under Code Sec. 7345(b)(2), a tax debt is excluded if it is a tax debt:

(1) being paid in a timely manner under an installment agreement entered into with the IRS;

(2) 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;

(3) for which a collection due process hearing is timely requested in connection with a levy to collect the debt; or

(4) for which collection has been suspended because a request for innocent spouse relief under Code Sec. 6015(f) has been made.

Procedures Before Passport Is Denied

Before denying a passport, the State Department will hold a taxpayer's passport application for 90 days to allow the taxpayer to:

(1) resolve any erroneous certification issues;

(2) make full payment of the tax debt; or

(3) enter into a satisfactory payment alternative with the IRS.

With respect to a passport that has already been issued, there is no grace period for resolving the debt before the State Department revokes the passport.

Taxpayer Notification - Notice CP 508C

The IRS is required to notify a taxpayer in writing at the time the IRS certifies a seriously delinquent tax debt to the State Department. The IRS is also required to notify the taxpayer in writing at the time it reverses certification. The IRS will send written notice by regular mail to the taxpayer's last known address.

Reversal of Certification - Notice CP 508R

Under Code Sec. 7345(c), the IRS is required to notify the State Department of the reversal of the certification when: (1) the tax debt is fully satisfied or becomes legally unenforceable; (2) the tax debt is no longer seriously delinquent; or (3) the certification is erroneous.

The IRS must 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.

A previously certified debt is no longer seriously delinquent when: (1) the taxpayer and the IRS enter into an installment agreement allowing the taxpayer to pay the debt over time; (2) the IRS accepts an offer in compromise to satisfy the debt; (3) the Justice Department enters into a settlement agreement to satisfy the debt; (4) collection of the debt is suspended because the taxpayer has requested innocent spouse relief under Code Sec. 6015(f); or (5) the taxpayer makes a timely request for a collection due process hearing in connection with a levy to collect the debt.

The IRS has stated that it will not reverse certification where a taxpayer requests a collection due process hearing or innocent spouse relief on a debt that is not the basis of the certification. Also, the IRS will not reverse the certification because the taxpayer pays the debt below $50,000.

Judicial Review of Certification

If the IRS certifies a debt to the State Department, the taxpayer may file suit in the U.S. Tax Court or a U.S. district court to have the court determine whether the certification is erroneous or if 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.

Code Sec. 7345 does not provide the court authority to release a lien or levy or award money damages in a suit to determine whether a certification is erroneous. A taxpayer is not required to file an administrative claim or otherwise contact the IRS to resolve the erroneous certification issue before filing suit in the U.S. Tax Court or a U.S. District Court.

Payment of Taxes

If a taxpayer can't pay the full amount of the tax debt owed, he or she can make alternative payment arrangements such as an installment agreement or an offer in compromise and still keep his or her U.S. passport.

If a taxpayer disagrees with the tax amount or the certification was made in error, the taxpayer should contact the phone number listed on Notice CP 508C. If the tax debt has already been paid, the taxpayer must send proof of that payment to the address on the Notice CP 508C.

If the taxpayer recently filed a tax return for the current year and expects a refund, the IRS will apply the refund to the debt and, if the refund is sufficient to satisfy the taxpayer's seriously delinquent tax debt, the account will be considered fully paid.

Passport Status

The State Department will notify a taxpayer in writing if his or her U.S. passport application is denied or if his or her U.S. passport is revoked.

If a taxpayer needs a U.S. passport to keep his or her job, once a seriously delinquent tax debt is certified, the taxpayer must fully pay the balance, or make an alternative payment arrangement to keep his or her passport.

If the Secretary of State decides to revoke a passport, the Secretary of State, before making the revocation, may: (1) limit a previously issued passport only for return travel to the United States; or (2) issue a limited passport that only permits return travel to the United States.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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