Don’t let clients get grounded by a tax debt

A long flight from Munich to Atlanta after spending Christmas in Austria gave the author a perfect opportunity to read all the pages in his passport for the first time since obtaining one more than 20 years earlier.

The fifth page of the U.S. passport makes it quite clear that it is U.S. government property that citizens have the privilege of holding:

U.S. Government Property: This passport is the property of the United States (Title 22, Code of Federal Regulations, and Section 51.9). It must be surrendered upon demand made by an authorized representative of the United States Government.

Taxpayers who have delinquent tax debt run the risk of having their passport revoked. On Dec. 4, 2015, the Fixing America's Surface Transportation (FAST) Act, P.L. 114-94, enacted Sec. 7345, which requires the IRS to notify the State Department of an unpaid tax debt and requires the State Department to deny, revoke, or limit the use of that individual's passport. Taxpayers are at risk of passport revocation if they have "seriously delinquent tax debt."

Under Sec. 7345(b)(1), a "seriously delinquent tax debt" is an unpaid, legally enforceable, and assessed federal tax liability of an individual, greater than $50,000, and for which:

• A Notice of Federal Tax Lien has been filed under Sec. 6323, and the taxpayer's right to a hearing under Sec. 6320 has been exhausted or lapsed; or
• A levy has been issued under Sec. 6331.

Under Sec. 7345(f), the $50,000 amount is adjusted for inflation. This amount is $52,000 for 2019.

The $52,000 threshold is calculated by aggregating the total amount of all current tax liabilities for tax years meeting the criteria under Sec. 7345(b)(1). This threshold includes all penalties and interest calculated on the balances due. In 2019, a self-employed taxpayer who is three years delinquent could easily reach the $52,000 threshold.

Some mitigating circumstances can apply for taxpayers whose delinquent taxes exceed this amount. Sec. 7345(b)(2) provides that a seriously delinquent tax debt does not include the following:

• A debt that is being timely paid under an IRS-approved installment agreement under Sec. 6159;
• A debt that is being timely paid under an offer in compromise accepted by the IRS under Sec. 7122;
• A debt that is being timely paid under the terms of a settlement agreement with the Justice Department under Sec. 7122;
• A debt in connection with a levy for which collection is suspended because of a request for a due process hearing (or because a request is pending) under Sec. 6330; and
• A debt for which collection is suspended because the individual made an innocent spouse election under Sec. 6015(b) or (c) or the individual requested innocent spouse relief under Sec. 6015(f).

When advising clients, it is critical to make them aware of these provisions. Under Sec. 7345(c)(2), if the IRS erroneously notifies the State Department, it is required to issue a reversal notification as soon as practicable. In all other situations, for example, such as the satisfaction of a lien or request for innocent spouse relief, the IRS has 30 days to notify the State Department.

A client may be shocked to hear about the new passport revocation process. The CPA needs to review the collection notices that were issued to the taxpayer to advise whether the revocation process could apply. Notices now include language regarding the requirement under the FAST Act to notify the State Department of the delinquency. For example, collection notice CP 90 states the following under the heading "Denial or Revocation of United States Passport":

The State Department generally will not issue or renew a passport to you after we make this notification. If you currently have a valid passport, the State Department may revoke your passport or limit your ability to travel outside the United States.

In her 2017 report to Congress, National Taxpayer Advocate Nina Olson included passport revocation on the list of the most serious problems facing taxpayers. Why? The passport revocation process affects taxpayer rights and creates an administrative burden that can significantly harm the taxpayer. In a blog post on Aug. 22, 2018, she shared the story of a taxpayer who had to have an installment agreement reinstated due to missing payments during and after a serious illness. Although the taxpayer contacted the IRS regarding reinstatement of the installment agreement, the agent neglected to input the installment agreement into the IRS system. Notification had already been sent to the State Department. Although the taxpayer met an exception to the certification to the State Department, the administrative error caused the passport revocation.

In her 2017 report, Olson recommended that the IRS begin issuing a notification to the taxpayer 30 days prior to the certification (90 days if the taxpayer resides outside the United States). This notice would outline the specific harm that will occur and outline all options available to taxpayers to avoid or reverse the certifications.

As tax professionals, CPAs understand the severity of collections issues with the IRS and the importance of responding to collection notices and resolving tax debt issues in a timely manner. In the passport revocation process, there is an added twist. Olson pointed out in her blog post that copies of the passport revocation notices are not being sent to taxpayer representatives. The IRS explains that the representative may not have represented the taxpayer for all years that encompass the debt resulting in the revocation. For this reason and a systematic limitation, no notices are being sent to third-party representatives even if the third party holds a valid power of attorney that includes all the tax years comprising the seriously delinquent tax debt.

When a taxpayer is facing a large tax debt that is over or near the $52,000 threshold, the options are limited to prevent further action from the IRS. Those options include:

• Pay the outstanding debt in full or at least pay enough to reduce the debt below the threshold;
• Establish an installment agreement;
• Consider an offer in compromise;
• Comply with a settlement through the Department of Justice;
• Request a due process hearing if eligible; or
• Consider innocent spouse relief if eligible.

There is one final thought to consider. The State Department acts only on information provided by the IRS. The State Department is not provided any information about the outstanding tax debt. Any delinquency issues must be resolved with the IRS. Once the issues are resolved, a taxpayer must rely on the Service to reverse the certification to the State Department. It should always be made clear to clients that they must answer IRS notices to avoid the consequences stemming from a seriously delinquent tax debt.