The IRS has announced its intention to increase enforcement. Given the annual tax gap and anticipated federal budget increases, this should come as no surprise. The annual tax gap — the estimated difference between taxes owed and taxes collected — is about $600 billion (Sarin,"The Case for a Robust Attack on the Tax Gap," Treasury website (Sept. 7, 2021)). Tax professionals can expect increased numbers of examinations, deficiency notices, liens, and levies.
Tax professionals should also consider one of the latest tools in the IRS enforcement arsenal that might not have come to mind — Sec. 7345 (revocation or denial of passport in case of certain tax delinquencies). Taxpayers can lose their U.S. passports over unpaid tax debts that meet certain criteria. This column discusses the statutory provisions of Sec. 7345, current IRS guidance in Internal Revenue Manual (IRM) Section 5.19.25, Passport Program (Aug. 12, 2020),and a recent court of appeals decision upholding the constitutionality of Sec. 7345.Sec. 7345 basics
Congress added Sec. 7345 to the Internal Revenue Code in late 2015 as part of the Fixing America's Surface Transportation Act, P.L. 114-94. It provides that if the IRS determines that an individual has a seriously delinquent tax debt and "certifies" the debt to the Treasury secretary, then the Treasury secretary will transmit that certification to the secretary of state, who will then deny, revoke, or limit the U.S passport of that individual (Sec. 7345(a)). In practice, the IRS commissioner of the Small Business/Self Employed (SBSE) Division has been delegated the authority to certify a seriously delinquent tax debt directly to the secretary of state (Sec. 7701(a)(11)(B); IRM §§188.8.131.52(3) and (4), Passport certification overview (Aug. 12, 2020)). The decision to deny, revoke, or limit a U.S. passport lies solely with the State Department.
A seriously delinquent tax debt means an unpaid federal tax liability that is (1) assessed; (2) exceeds $50,000 (adjusted for inflation, which for year 2022 is $55,000, pursuant to Rev. Proc. 2021-45, Section 3.59); and (3) with respect to which the IRS has filed a Notice of Federal Tax Lien or levied with respect to the debt, and Collection Due Process (CDP) rights have been exhausted or have lapsed (Sec. 7345(b)(1)). Thus, any individual taxpayer with a tax debt meeting these criteria could be at risk for passport denial, revocation, or limitation unless he or she qualifies for an exception.
The Code provides statutory exceptions. The debt is not a seriously delinquent tax debt if the taxpayer is timely paying it through an offer in compromise or an installment agreement or if collection on the debtis currently suspended because the taxpayer requested a CDP hearing or has a pending hearing. In addition, a tax debt is not seriously delinquent if the individual taxpayer requested innocent-spouse relief for the debt under Sec. 6015 (Sec. 7345(b)(2)).
If the IRS has certified the debt as seriously delinquent but then learns the taxpayer meets one of the exceptions, the Service is obligated to reverse the certification. The IRS is also obligated to reverse the certification if the debt with respect to the certification was fully satisfied or the original certification is found to be erroneous (Sec. 7345(c)).
If an individual taxpayer is certified and does not qualify for an exception or a reversal of certification, the only statutory remedy is judicial. The taxpayer will receive a CP508C notice informing him or her of certification to the secretary of state under Sec. 7345(a). This notice informs the taxpayer of the right to bring a civil action in either the Tax Court or a U.S. district court (Sec. 7345(d)). However, the jurisdiction is narrowly limited to whether the certification was erroneous or whether the commissioner failed to reverse the certification (Sec. 7345(e)(1); Ruesch, 154 T.C. 289 (2020)). In other words, the taxpayer may not challenge the underlying liability as with a deficiency case filed in response to a 90-day statutory notice of deficiency. Thus, the only relief available to the taxpayer is an order to the Treasury secretary to notify the secretary of state that the certification was erroneous (Sec. 7345(e)(2)).IRS guidance
The IRS began issuing guidance in 2018. It is contained in IRM Section 5.19.25, Passport Program (Aug. 12, 2020), and provides important additional exceptions and definitional clarifications. First, in addition to the above statutory exceptions, the IRS added IRM Section 184.108.40.206, Discretionary Exclusions From Certification (Aug. 12, 2020). These exclusions include: (1) debt that is currently not collectible due to hardship; (2) debt that resulted from identity theft; (3) debt of a taxpayer in bankruptcy; (4) debt of a deceased taxpayer; (5) debt included in a "pending" offer in compromise; (6) debt included in a "pending" installment agreement; (7) debt with a pending adjustment that will fully pay the tax liability for the period; and (8) taxpayers in a disaster zone. The IRM notes that this list is subject to change. It further explains that the use of "discretionary" in the IRM means that the agency has decided in its discretion that any taxpayer qualifying for an exclusion will be decertified, not that IRS employees can exercise individual discretion. Thus, any individual taxpayer who meets the IRM's exclusion criteria will be decertified.
The guidance also clarifies other issues left open by a plain reading of Sec. 7345.
Seriously delinquent tax debt
The $50,000 threshold (adjusted for inflation) is an aggregate of unpaid assessed balances and includes tax, penalties, and interest. Nonassessed accrued penalties and interest are not included (IRM §220.127.116.11(2)). The tax portion includes but is not limited to tax assessed under an individual's taxpayer identification number (Social Security number or employer identification number) such as income taxes, trust fund recovery penalties, business taxes for which the individual is liable, and other civil penalties (IRM §18.104.22.168(3)). When assessing a client's risk, it is important to consider the breadth of debt that can be considered to meet the threshold of being seriously delinquent.
A requested or pending CDP hearing is a statutory exception. However, such a hearing must be requested within 30 days of the CDP notice date, or else it is considered an equivalent hearing, so long as it is requested within a year. A timely appeal of a notice of determination from a CDP hearing can be brought in Tax Court, but not for a notice of decision from an equivalent hearing. The IRM clarifies that a pending or requested equivalent hearing is not within the statutory exception (IRM §22.214.171.124(1)). Thus, taxpayers should always timely request a CDP hearing because, at minimum, that will prevent the certification or establish grounds for reversal of certification while the taxpayer is challenging the collection.
No administrative or appeals process
No administrative appeals, claim processes, or administrative hearings can be filed with the IRS if a taxpayer believes that a certification is erroneous. The sole remedy is to bring a civil action in the Tax Court or a U.S. district court (IRM §126.96.36.199). This is not taxpayer-friendly, and to the extent there is no exception or exclusion, the taxpayer must file a civil action for decertification relief, as explained above.
Reversal of certification
The statute obligates the commissioner to reverse a certification once a taxpayer qualifies for an exception because it would then exclude the debt from the definition of a seriously delinquent tax debt. A taxpayer may not, however, simply pay down the debt to below the qualifying inflation-adjusted threshold to remove it from the statutory definition (IRM §188.8.131.52(1)). But, in other situations, the debt could be adjusted to below the threshold, making it no longer seriously delinquent and therefore subject to decertification. For example, if a penalty abatement based on reasonable cause is granted and the debt amount drops below the threshold, the certification will be reversed (IRM §184.108.40.206(4)(e)). However, the IRM cautions that if the debt drops below the threshold based on first-time abatement relief, the certification will not be reversed. Another example of a circumstance justifying discretionary reversal is when a certification is based on a substitute-for-return assessment and the taxpayer afterward files a return that shows tax below the threshold. In that case, the certification will be reversed upon processing of the return (id.).
A taxpayer who neglects disputed tax debts that in the aggregate exceed the threshold amount may receive a CP508C notice and face possible restrictions on the right to travel under a U.S. passport. Navigating the statute and the additional guidance can be challenging, and, in the absence of an exception or exclusion, the only recourse is to file a civil action (or fully pay, if warranted). Such was the case with a taxpayer in Maehr v. United States Dep't of State, 5 F.4th 1100 (10th Cir. 2021); however, the taxpayer inMaehr challenged the constitutionality of Sec. 7345.Maehr
The taxpayer in Maehr was certified to have a seriously delinquent tax debt of approximately $250,000 in taxes and penalties for tax years 2003-2006. After surrendering his passport, he filed a civil action in district court seeking reinstatement of his passport, arguing that Sec. 7345 was unconstitutional on the grounds that it violated (1) the Privileges and Immunities clauses of the U.S. Constitution in Article IV, Section 2, and the 14th Amendment; (2) his fundamental right to travel; and (3) substantive due process.
The district court rejected all his arguments, finding that the rules and restrictions of Sec. 7345 were rationally related to a legitimate government interest (Maehr v. United States Dep't of State, No. 18-cv-02984-PAB-NRN (D. Colo. 2/28/20)). This lower level of constitutional scrutiny was affirmed by the Tenth Circuit on each argument, thus creating a significant appellate court precedent upholding the constitutionality of Sec. 7345.Charging ahead?
The IRS may charge ahead with passport revocation as a collection tool in 2022. It resumed certifications and notices to taxpayers under the program in March 2021, after the People First Initiative had suspended it a year earlier in response to the COVID-19 pandemic. The IRM guidance clarified aspects of Sec. 7345 and made clear that "taxpayer certifications will be provided systemically to the U.S. Department of State on a weekly basis" (IRM §220.127.116.11(4)). The Tenth Circuit upheld the statute's constitutionality in Maehr, and the Tax Court made clear its limited scope of review and remedy in Ruesch. With no appeal or administrative options and with a very narrow judicial remedy, affected taxpayers must understand and, if necessary, assert the various exceptions and exclusions explained in this column.
|Evan M. Stone, J.D., LL.M., is a senior director, Tax Controversy Services, with RSM US LLP Washington National Tax in Washington, D.C. For more information about this column, contact email@example.com.