IRS Passport Revocation Raises Questions, Problems for Taxpayers
Starting in 2017, the IRS and State Department will be revoking passports for taxpayers with seriously delinquent tax debt. But the process raises questions and problems for individuals and tax preparers alike. Find out what to watch out for with this important new law.
How the IRS Passport Law Works
The last blog post explained the mechanics of Internal Revenue Code § 7345 and what taxpayers need to do to protect their right to international travel. Generally speaking, the law allows the IRS to "certify" certain taxpayers to the State Department if they have as "seriously delinquent tax debt". This includes over $50,000 in unpaid taxes, interest, and penalties. Once it receives certification on a particular taxpayer, the State Department may revoke that taxpayer's passport and will deny any future passport applications. To get off the certification list, a taxpayer must:
- Pay the delinquency in full with all interest and penalties
- Enter into an installment agreement, "Offer in Compromise", or settlement agreement with the IRS or Justice Department
- Qualify for innocent spouse relief
- Request a timely due process hearing on a tax levy for collections purposes
That much of the law is clear, but CPAs and tax attorneys foresee problems on the horizon, many of which arise from unanswered questions about how the IRS will execute the law.
How Will You Find Out Your Passport Was Revoked?
When the IRS certifies a taxpayer for passport revocation, IRC § 7345 requires it to send the taxpayer written notice of the certification by regular mail to the taxpayer's last known address. Similarly, when the State Department revokes or denies a passport based on that certification, it will send written notice to the same place. However, when taxpayers spend considerable periods of time overseas, visiting family or conducting business, they may not receive this physical mail in a timely way. For many travelers, it is likely that their first notice that their passports have been revoked will be when the documents are seized and destroyed at the U.S. border. This could cut taxpayers off from filing timely challenges and correcting the problem.
How Will the $50,000 Threshold be Calculated?
The IRS has made it clear that the $50,000 threshold will include interest and "any penalties". However, some experts are asking whether that will include "assessable penalties". These penalties can be assessed for failure to meet certain tax filing requirements, even when no federal taxes are owed directly. For example, if a U.S. taxpayer is an officer, director, or shareholder of a foreign corporation, he or she is required to file Form 5471, "Information Return of U.S. Persons with Respect to Certain Foreign Corporations" as an attachment to his or her annual tax return. If that form is missing, the IRS automatically imposes $10,000 penalties per violation, per year. A sophisticated taxpayer, with a variety of overseas business interests, could easily cross the $50,000 threshold without owing a dollar in federal taxes. But it is unclear whether certification can be based solely on these assessable penalties. This question could also apply to taxpayers assessed FBAR penalties for failure to file foreign asset disclosures.
A related question is whether the $50,000 threshold applies each year, or whether the IRS will add up all of the taxes, interest, and penalties incurred over time. The IRS has made clear that "the IRS will not reverse the certification because the taxpayer pays the debt below $50,000." If the threshold is calculated in the aggregate, a taxpayer could enter into a payment agreement one year, only to be certified for passport revocation again the next.
Is Your Identity Information Secure?
IRC § 7345 authorizes the IRS to share taxpayer information with the State Department, including social security numbers and other identifying information. The IRS employees must comply with strict security protocols which control who has access to taxpayers' data. It is not clear that the State Department will be required to build in the same protections. This could put taxpayers at risk for security breaches and identity theft.
How Can an International Professional Get Fast Relief?
If your livelihood depends on international travel or doing business overseas, any interruption in your passport could substantially affect your bottom line. The only way under the law a taxpayer can challenge IRS certification is by filing a lawsuit in U.S. Tax Court or U.S District Court. That process takes time, during which the taxpayer will not be able to travel for work or family. It is also expensive, especially because the law does not provide for any kind of money damages.
The IRS's solution for taxpayers with immediate travel plans is to call and arrange some form of payment plan or compromise. However, given the IRS's limited staff and funding, it can take a busy IRS Revenue Officer many months to review and approve any application for an installment agreement or offer in compromise. The law allows the State Department to hold a passport application for 90 days while the taxpayer negotiates a satisfactory payment alternative. However, this process often takes far longer.
Even if a taxpayer achieves decertification, there could still be additional delays. While the law requires the IRS to notify the State Department within 30 days of the resolution, there is no requirement for the State Department do anything with that notification in a timely manner.
There are many questions about how the IRS passport revocation process will affect sophisticated taxpayers living, traveling, and working abroad. The best course of action for taxpayers who think they may have substantially delinquent tax debts is to talk to a tax attorney now. Proactive intervention with the IRS can keep the agency from issuing certification, and protect your passport and your business.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding seriously delinquent tax debt or Notices of Certification for the revocation or denial of passports due to tax debt, contact Joe Viola to schedule a consultation.