$50,000 in tax debt can ground travelers

By Allen Schuldenfrei, CPA, J.D.

$50,000 in tax debt can ground travelers
Photo by YinYang/iStock

Tucked away in a transportation bill signed in December by President Barack Obama is a provision requiring the IRS to refer seriously delinquent taxpayers to the U.S. State Department for denial or revocation of a passport.

The Fixing America's Surface Transportation Act (FAST Act), P.L. 114-94, added Sec. 7345, which authorizes the IRS to certify to the secretary of State that a taxpayer is seriously delinquent with his or her taxes. The State Department can then deny, revoke, or limit the taxpayer's passport.

SERIOUSLY DELINQUENT TAXPAYER

To qualify as seriously delinquent, the taxpayer must owe the IRS over $50,000 (indexed annually for inflation), including assessed taxes, interest, and penalties. Second, a notice of a lien must have been filed and all administrative appeal rights exhausted or lapsed, or a notice of a levy filed. Both the notice of the filing of a tax lien and the notice of the IRS's intent to levy must contain information regarding Sec. 7345 relating to the certification of seriously delinquent tax debt and the denial, revocation, or limitation of passports of individuals with such debt.

When sending the certification to the State Department, the IRS must provide contemporaneous notice to the taxpayer. Upon receipt of the certification from the IRS, the State Department is prohibited from issuing the seriously delinquent taxpayer a passport except for emergency or humanitarian reasons. The State Department may revoke a previously issued passport. If the taxpayer is already out of the country, the State Department must either limit the previously issued passport to return travel to the United States or issue a limited passport that permits travel only to the United States.

Taxpayers are excepted from being considered seriously delinquent if:

  • They are making timely payments under an installment arrangement or an offer in compromise;
  • Their collection activity is suspended because they requested a collection due process hearing; or
  • They requested innocent spouse relief.

Alert: A literal reading of the statute suggests that waiting for a pending offer to be accepted or for an equivalent hearing will not prevent the IRS from certifying the taxpayer as seriously delinquent. Also, a taxpayer whose account has been classified by the IRS as "currently not collectible" might still be certified as seriously delinquent. Further resolution of these issues awaits promulgation of Treasury regulations.

REVERSAL OR WITHDRAWAL OF CERTIFICATION

If taxpayers satisfy their debt in full or it is no longer legally enforceable (e.g., due to the expiration of the collection statute of limitation), the IRS must notify the State Department and the restriction must be lifted. When doing so, the IRS must send contemporaneous notice to the taxpayer as well. Additionally, if the taxpayer enters into an installment agreement with the IRS, the IRS accepts the taxpayer's offer in compromise, or the taxpayer requests innocent spouse relief, the IRS must notify the State Department to withdraw the certification.

Note that paying the balance down to under $50,000 after certification will not be a valid reason for the IRS to request the withdrawal of the certification.

CURRENT LIENS AND LEVIES

Notices of intent to file a lien or to levy issued before Dec. 4, 2015, should not cause a taxpayer to qualify as a seriously delinquent taxpayer because these notices do not contain the requisite language informing taxpayers of this new provision, as required by Section 32101(b) of the FAST Act.

JUDICIAL REVIEW

Taxpayers who think the IRS erroneously certified or wrongfully refuses to decertify them can seek judicial review by filing a civil claim in a U.S. district court or in the Tax Court.

PLANNING POINTERS

Taxpayers can assure uninterrupted use of a passport, obviously, by staying current with their tax obligations in the first place. Second, even if taxpayers fall behind in their tax payments, if possible, they should pay enough to the IRS to bring the accounts over $50,000 to below that level. Third, even if the amount exceeds $50,000, they can prevent the certification by entering into an installment agreement or having the IRS accept an offer in compromise. However, it could easily take upwards of a year in some circumstances for the IRS to decide whether to accept an offer in compromise. Entering into an installment agreement or having an offer in compromise will be effective even after the taxpayer has already been certified. Finally, a request for innocent spouse relief will prevent certification of the requesting spouse and, if already certified, will require the IRS to decertify the taxpayer's delinquency status.

Allen Schuldenfrei (lawyerallen@yahoo.com) is an attorney who also teaches at Towson University in Towson, Md.

To comment on this article or to suggest an idea for another article, contact Paul Bonner, senior editor, at pbonner@aicpa.org or 919-402-4434.

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