Sandra D. Mertens, ESQ, & Richard M. Dale, ESQ of Dale & Gensburg, P.C.
200 West Adams Street, Suite 2425, Chicago, IL 60606
On December 4, 2015, Congress enacted Public Law 114-94 (129 Stat. 1312), titled “Fixing America’s Surface Transportation Act” (the “FAST Act”). The FAST Act’s stated purpose is to authorize funds for federal highways, highway safety programs, and transit programs. However, the FAST Act also contains a new Internal Revenue Code (the “Code”) provision which could jeopardize the passports of taxpayers who have large tax debts.
Specifically, the FAST Act adds a new Code Section 7345, which states: “If the Secretary [of the Treasury] receives certification by the Commissioner of Internal Revenue that an individual has a seriously delinquent tax debt, the Secretary shall transmit such certification to the Secretary of State for action with respect to denial, revocation, or limitation of a passport pursuant to section 32101 of the FAST Act.” 26 U.S.C. § 7345. The section defines the term “seriously delinquent tax debt” to include an assessed liability which is greater than $50,000, where the IRS has filed either: (a) a notice of federal tax lien (and appeal rights thereunder have lapsed or been exhausted) or (b) a levy. The liability threshold will be adjusted for inflation in increments of $1,000.
The new statute is vague as it does not specify whether the $50,000 threshold relates to a single tax liability or multiple tax liabilities which add up to $50,000 in the aggregate. While the statute speaks of the threshold in the singular (“an unpaid tax liability which has been assessed which is greater than $50,000 and with respect to which a notice of lien has been filed… or a levy has been made”), it is possible that the IRS revenue officers who carry out the statute may be aggressive and attempt to apply the statute to aggregate liabilities. Tax practitioners know how easy it is for taxpayers to incur tax liabilities for multiple periods aggregating such an amount.
Similarly, the new statute does not specify whether or not the “seriously delinquent tax debt” includes penalties and interest, which can add up quickly to reach the minimum threshold. Nor does it specify whether it applies to all types of taxes, or only specific taxes such as income tax, where the taxpayer is an individual who may have a passport. For example, an entity may incur employment taxes exceeding the threshold, but would not be affected by the new law because the entity does not possess the ability to travel via a passport. However, the law could potentially be applied to a responsible officer who is assessed trust fund recovery penalties in excess of the threshold, preventing the responsible officer from traveling or verifying his or her identity with a passport.
The new law excepts a taxpayer’s liability from being included in the definition of “seriously delinquent tax debt” if the debt is subject to an installment agreement or if collection of the tax debt is suspended because of a pending due process hearing under Code Section 6330 or a pending innocent spouse petition under Code Section 6015 (b), (c), or (f). The certification may be reversed “if such certification is found to be erroneous or if the debt with respect to such certification is fully satisfied or ceases to be a seriously delinquent tax debt” (i.e., the amount is reduced below $50,000 or becomes legally unenforceable) under limited circumstances.
These exceptions are very narrow and could lead to abuse by IRS revenue officers. For example, it does not cover taxpayers who have been placed on “currently not collectible” status, taxpayers who are on a “bankruptcy hold” because of a Chapter 7 or 11 filing, or a taxpayer who is in the process of negotiating a resolution with a Revenue Officer or IRS Collections Agent. Further, the exceptions do not cover a taxpayer whose account is on a “collections hold” because he has submitted an offer in compromise and is waiting for the IRS to respond.
TAXPAYER’S BURDEN TO CONTEST
If a taxpayer contests the validity of the certification, the taxpayer may bring a civil action against the U.S. in a U.S. District Court or the Tax Court. If the court determines that the certification was erroneous, then the court can order the Secretary of the Treasury to notify the Secretary of State to release any passport restrictions.
From a practical perspective, requiring a taxpayer to challenge the determination in court is both costly and inconvenient. The statute does not provide any administrative remedy, such as the ability to contest the certification determination with IRS Appeals. This means that the IRS can revoke a taxpayer’s passport, and if the revocation was erroneous, it could still take the taxpayer a year or more plus costly legal fees and court costs to get back his or her passport privileges. Rather, if the statute provided for an administrative appeal before the revocation occurred, the taxpayer would have an opportunity to work out a payment resolution with an IRS Appeals Officer, which would actually fulfill the intent of the statute (to obtain payment of tax debts).
The new law enacted through the FAST Act appears to be poorly and vaguely drafted and subject to abusive interpretations by IRS agents because of uncertainty and the “holes” left by its drafters. Whether the law was meant to target jet set tax avoiders or generally to encourage faster payment resolutions, the practical effect will be to punish even innocent taxpayers who are trying to resolve their tax debts in good faith. It may also punish U.S. citizens living abroad who simply do not know of their U.S. tax debt because the IRS does not have a current address for them to which to send notices. Consider a student studying abroad for a year who is assessed an income tax debt for a prior year, but does not receive any notice because the IRS sent the notices to the student’s last known address in the U.S. The student’s passport may be revoked without his or her knowledge or ability to object, and the student may simply not be able to return home to correct the problem.
In short, Section 7435 could potentially be very harmful to U.S. taxpayers, and it will be very important for tax practitioners to inform taxpayers of their exposure to the loss of their passport and make every attempt to avoid such a result. A court may deem Section 7435 unconstitutional for its vagueness, violation of due process, and harsh results on innocent taxpayers. It is also possible that the IRS may issue regulations or Internal Revenue Manual provisions which would help to temper the potential ill effects of the statute. Tax practitioners should watch for further developments in this new area of tax collection.