Certification of seriously delinquent tax debt not erroneous

The D.C. Circuit held that, because each of the definitional elements of a seriously delinquent tax debt (SDTD) in Sec. 7345(b)(1) was satisfied, the IRS’s certification of a taxpayer’s liability as an SDTD was not erroneous within the meaning of Sec. 7345(c).

Sec. 7345

If the IRS certifies to the Treasury secretary that an individual has an SDTD, the Treasury secretary is required to transmit the certification to the secretary of State for action with respect to denial, revocation, or limitation of the individual’s passport (Sec. 7345(a)).

Sec. 7345(b)(1) defines an SDTD as an “unpaid, legally enforceable Federal tax liability of an individual” that (1) was assessed; (2) is greater than $50,000 (as adjusted for inflation); and (3) with respect to which the IRS must have either (a) filed a notice of lien under Sec. 6223 and with respect to such filing the individual’s Sec. 6320 administrative rights have been exhausted or lapsed, or (b) made a levy under Sec. 6331 on the individual’s income or other property.

Under Sec. 7345(b)(2), even if the Sec. 7345(b)(1) requirements are met, a tax debt is not seriously delinquent if the debt is being paid in a timely manner under an agreement with the IRS or if collection of the debt is suspended because the individual has requested a Collection Due Process (CDP) hearing or is pursuing relief from joint liability. Under Sec. 7345(c), the IRS must notify the secretary of the Treasury, who in turn must notify the secretary of State, if the certification of an SDTD is erroneous, the debtor fully satisfies the tax debt, the debtor agrees to an installment agreement or an offer in compromise, or the debtor qualifies for innocent–spouse relief.

The IRS must contemporaneously notify an individual of any certification of an SDTD under Sec. 7345(a) with respect to that individual. The individual may challenge the SDTD certification in district court or Tax Court as erroneous or on the grounds that the IRS did not reverse the certification when required (Sec. 7345(e)).

Background of case

Blake Adams failed to file federal income tax returns for 2007 and 2009—2015, and upon audit, the IRS determined that he owed more than $1.2 million. Adams claimed that the IRS never mailed him deficiency notices for the relevant years. Having not received the deficiency notices, he did not timely file a petition in Tax Court to challenge the deficiencies. Accordingly, the IRS proceeded to assess the deficiencies, but Adams claimed that he also never received notice of those assessments.

The IRS then sought to collect from Adams. Between August 2015 and December 2019, the IRS filed notices of lien for the years at issue and notified Adams of his right to a CDP hearing with respect to the liens (which he acknowledged receiving). Between August 2016 and December 2019, the IRS also issued notices of intent to levy against Adams for the years at issue. Like the notices of lien, these notices informed Adams about his right to a CDP hearing. Despite the notifications he received about his right to a CDP hearing, Adams never requested one.

The IRS proceeded to issue the levies between 2017 and 2020, but it recovered only about $26,700 of what Adams owed. This left Adams with outstanding liabilities in excess of $1.1 million.

On March 16, 2020, in furtherance of its collection efforts, the IRS, under Sec. 7345, certified to the State Department that Adams owed an SDTD, following up on previous SDTD certifications in 2018 and 2019. Adams had not challenged those earlier certifications.

In December 2020, however, Adams petitioned the Tax Court, challenging the IRS’s 2020 SDTD certification. Adams argued five points in his petition: (1) the IRS never sent him “any documents by 1st class or certified mail explaining what these taxes are based on”; (2) the IRS never sent him “any letter, giving [him] due process & opportunity to challenge the tax” for years 2007 and 2009—2015; (3) the $1.2 million the IRS claimed he owed was “completely baseless, arbitrary, [and] lacking any foundation of fact”; (4) the IRS “did not perform all the legally required procedures necessary to assess the tax” that it claimed he owed; and (5) the certification was an “unconstitutional taking away” of his right to travel.

The government moved for summary judgment, which the Tax Court granted (Adams, 160 T.C. 1 (2023)). To the extent that Adams was asserting that the IRS’s calculation of his tax debt was incorrect, the court held that it lacked jurisdiction to review the tax liabilities underlying the certification and that, even if the IRS had failed to mail the required notices during its collection actions, the certification was not “erroneous” under Sec. 7345. The Tax Court further held that it lacked jurisdiction to review the secretary of State’s discretionary determination on receipt of an SDTD certification to revoke, deny, or limit the taxpayer’s passport or to review Adams’s constitutional right–to–travel claim. Adams timely appealed the Tax Court’s decision.

The DC Circuit’s decision

The D.C. Circuit, finding that each of the three requirements in Sec. 7345(b)(1) to certify Adams’s liability as an SDTD had been met, affirmed the Tax Court and held that the IRS’s certification of his SDTD was not erroneous. The court did not address the constitutional claim that Adams had raised in Tax Court because he did not raise it in his appeal.

As the D.C. Circuit explained, Sec. 7345(e) provides for injunctive relief from an erroneous SDTD certification or one that the IRS should have but failed to reverse. Adams’s only argument for relief was that the certification itself was erroneous; he did not contend that any of the other grounds for reversal under Sec. 7345(c) applied.

The D.C. Circuit noted that Sec. 7345 does not specify when a certification may be “found to be erroneous.” The court found, though, that the phrase is most naturally read to apply when any of the three requirements in Sec. 7345(b)(1) for a liability to be an SDTD are not satisfied or when either of the two statutory exceptions to an SDTD in Sec. 7345(b)(2) applies.

Here, the D.C. Circuit found that the Tax Court had correctly determined that Adams’s liability was an SDTD because each of the requirements in Sec. 7345(b)(1) was satisfied: Adams’s tax liability had been assessed, the amount was greater than the minimum threshold as adjusted for inflation of $53,000, and the IRS had filed a notice of lien for which Adams’s Sec. 6320 administrative rights had lapsed. Furthermore, Adams had not claimed that either of the statutory exceptions in Sec. 7345(b)(2) applied — that he was paying his tax debt under an agreement with the IRS or that collection was suspended pending a CDP hearing or a petition for relief from joint liability.

Adams’s primary argument on appeal was that the IRS was required by Sec. 7345(b)(1)(A) not just to have assessed the tax but to have assessed it “properly.” Specifically, Adams contended that the IRS had not assessed the tax properly because it did not serve him notice of each deficiency and assessment in the statutorily prescribed manner. According to Adams, this meant the assessments were illegal and therefore could not support the certification of an SDTD.

The D.C. Circuit disagreed, finding that the Code forecloses this argument. Under Sec. 6203, “assessment” means “recording the liability of the taxpayer in the office of the Secretary [of the Treasury] in accordance with rules or regulations prescribed by the Secretary.” As the Tax Court had noted, there was no dispute that the IRS had recorded Adams’s liabilities.

As the D.C. Circuit explained, Adams was attempting to challenge his underlying tax liability. However, Adams had been given opportunities to timely challenge his liability in CDP hearings but had failed to avail himself of these opportunities, so the court found he could not challenge them in a Sec. 7345 passport action. As the court stated, “Section 7345 plainly forecloses such an eleventh–hour collateral attack on a person’s underlying tax liabilities.”

Reflections

Adams moved to change the venue of his case from the D.C. Circuit, the default venue for appeals from the Tax Court, to the Eleventh Circuit, which is the circuit in which he resided. He argued that the venue should be the Eleventh Circuit because, under Sec. 7482(b)(1)(A), appeals of Tax Court cases in which an individual is seeking a redetermination of tax liability are reviewable in the circuit where the individual lives.

However, as the D.C. Circuit noted, Adams petitioned the Tax Court for recission of the certification of his liability as an SDTD, and he had not and could not have petitioned the court for a redetermination of tax liability, even though he asserted that the tax liability underlying his SDTD was imposed in error. Finding that it could not construe Adams’s petition as seeking legal relief that was not available, the court determined Sec. 7482(b)(1)(A) did not apply and denied his motion to transfer venue to the Eleventh Circuit.

Adams, No. 23–1063 (D.C. Cir. 12/6/24)