Taxpayers with IRS liabilities could lose passport privileges

Recently, President Obama approved legislation that authorizes the State Department to take action against the US passport of a person who has a “seriously delinquent tax debt” as certified by the IRS. Under the legislation, the State Department must deny a passport or turn down the renewal of a passport for taxpayers certified with such debt. The State Department may, but is not required to, revoke an existing passport for taxpayers certified with such debt.

What is seriously delinquent tax debt?

Seriously delinquent tax debt is a total assessed federal tax liability—including interest and penalties—in excess of $50,000 for which (i) a notice of lien has been filed and administrative rights to such filing have been exhausted or have lapsed, or (ii) a levy has been made.

Exceptions include debt being paid pursuant to an installment agreement or an offer in compromise and debt suspended from collection due to a pending collection due process hearing or an innocent spouse request. Emergency circumstances or humanitarian reasons are also exceptions, but it is unclear at this time how liberally the State Department will define them.

The law does not appear to create an exception for a taxpayer in “currently not collectible” status, with a pending installment agreement, or who merely submits an offer in compromise and is awaiting review. The new legislation could prove particularly harsh for a taxpayer who submits an offer in compromise and must wait several months, if not more than a year, before the IRS may accept the offer in compromise.

How will the certification process work in practice?

The IRS must notify a taxpayer of a certification made regarding a seriously delinquent tax debt and must include in such notice a description of the individual’s right to bring a civil action in federal district court or US Tax Court to determine whether the certification was erroneous.

An action filed in court does not appear to afford the individual an opportunity to challenge the underlying basis for the debt, but instead is limited to the determination of whether the taxpayer’s debt is seriously delinquent as defined by the statute and subject to certification.

What happens to a taxpayer whose passport is revoked while outside the US?

The legislation says if the State Department decides to revoke a passport, it must, before revocation, either (i) limit a previously issued passport only for return travel to the US, or (ii) issue a limited passport that only permits return travel to the US. In other words, the taxpayer is not necessarily stranded outside the US if the passport is revoked while out of the country.

Should taxpayers who do not travel internationally care about this?

Not immediately, but soon. The Real ID Act of 2005 established a national standard for state-issued forms of identification, and several states are still not in compliance. These state IDs may not be valid identification for domestic flights.

In January, the Department of Homeland Security announced an extension for states to comply with the Real ID act to Jan. 22, 2018, for domestic air travel purposes. In other words, if a state ID does not meet the Real ID Act standards as of Jan. 22, 2018, a traveler may have to use a passport or scramble to obtain another approved document. This is clearly a developing situation that warrants monitoring.

Going forward

Taxpayers who use a US passport and owe—or anticipate owing—the IRS are encouraged to plan ahead. It may be far easier to avoid passport issues if the taxpayer addresses the debt when it first arises, as opposed to when the IRS has already certified the taxpayer with a seriously delinquent tax debt. Taxpayers who owe the IRS should consult with professionals as soon as possible to assist in negotiating the payment of an outstanding tax liability.

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.