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Avoid a Summer Bummer from the IRS

Suntan lotion? Check. Surfboard? Check. Passport? Not so fast.

Some summer sojourns abroad could be disrupted this season, as the Internal Revenue Service recently began enforcing a little-known provision of the Fixing America's Surface Transportation (FAST) Act that allows the agency, through the U.S. State Department, to revoke – or prevent the issuance of – a passport to any taxpayer who is found to have a "seriously delinquent tax debt."

The relevant provision – section 7345 of the Internal Revenue Code – was originally enacted during the 2015-2016 Congressional Session and languished until this February, when the IRS suddenly began exercising its power to send certifications of unpaid tax debt to the State Department. This seems to be a "hammer" the IRS long desired and one that aligns with President Trump's aim to bring in additional revenue by collecting overdue tax debt.

Under this process, anyone with a "seriously delinquent tax debt" – any "unpaid, legally enforceable federal tax debt more than $51,000 (including interest and penalties)" – is subject to having their passport seized or new application denied.

Before the IRS can start this procedure, however, it must either (1) file a notice of federal tax lien or (2) issue a levy on the debt (e.g. against the taxpayer's bank account, a garnishment on their wages).

Note that this is an "OR" test, despite some statements to the contrary that are out there. Once the IRS meets either requirement, it can certify the debt to the State Department, which is then empowered to deny the taxpayer's passport application and/or revoke a current passport.

In any case, before the State Department takes this action, taxpayers are allowed 90 days to try to resolve any certification issues, make full payment of the tax debt or enter into a payment arrangement with the IRS.

Be Proactive

If you really want to ride those foreign waves but think you may be at risk, you must take some affirmative action. Obviously, the first lesson is to pay any taxes if you plan to leave the country. But if you don't, for whatever reason, remember these pointers:

  • If you feel the government has erred, you have the right to challenge the actions of the IRS or the State Department in U.S. Tax Court or U.S. District Court. You may also request a collection due process hearing if you believe the government failed properly to follow the necessary administrative steps; if you succeed, the levy will be held in abeyance.
  • Otherwise, the quickest solution is to obtain an installment agreement with the IRS, which would allow you to pay the debt off over time. You can finalize such an agreement in a matter of weeks (or days if you can get a human being at the IRS on the phone to help) once you have assembled all of your relevant documentation. If you already have an IRS-approved installment agreement and are compliant (i.e., making timely payments and not in default), you will be fine.
  • Experience shows that the IRS historically accepts offers in compromise, which settle a taxpayer's tax liabilities for less than the full amount owed, at a 15 to 25 percent rate. This can be your best option if you have a really compelling tale of woe. Although it can take a very long time to get resolution – more than a year in some cases – filing an offer in compromise will be sufficient to let you leave the country, even if the request is still pending when you go.
  • Your passport won't be at risk if you have already filed bankruptcy or if you show the IRS that you are the victim of identity theft.
  • If your spouse has caused the debt in question, you can request innocent spouse relief under section 6015 of the IRS Code. Successful applications will suspend collection of the debt and you will be clear to travel.

Other Important Things to Know

  • The IRS must issue a reversal of certification to the State Department if your debt: Is fully satisfied, has become legally unenforceable, is no longer seriously delinquent, or is subject to a settlement agreement. The agency also must do so if your application for innocent spouse relief is granted or if you make a timely request for a collection due process hearing. You will be free to use your passport once you receive the reversal of certification from the IRS.
  • Taxpayers cannot avoid losing their passport by paying a nominal amount to bring their tax debt just under the $51,000 threshold. Yes, it has been tried.
  • The IRS must notify you in writing that they are going to certify your debt to the State Department, but they are only obligated to mail it to the last known address they have for you on file. This is thus a potential glitch in the system for those who relocate without filing a change of address with the IRS.
  • If the IRS determines that your debt is currently not collectible because you have proven hardship status, they will put your case in a holding pattern batch.
  • If the taxpayer is abroad at the time the passport is revoked, the IRS and State Department will issue a limited validity passport for your direct return to the US only. (What better way to say "we've missed you"?)

Although taxpayers have the right to represent themselves when challenging the IRS (or the State Department), it's always best to consult with a tax lawyer instead of going solo against the "world's most powerful debt collector."

Turner Padget lawyers have helped individuals from all walks of life, as well as numerous estates and businesses, to obtain installment plans, file offers in compromise and otherwise challenge these actions. Please let us know if there's any way we can assist.

Bon voyage!

David Johnson is of counsel at Turner Padget, where he handles various types of complex tax and transactional issues for businesses and individuals throughout South Carolina. He has significant experience in negotiating settlements with the Internal Revenue Service and the South Carolina Department of Revenue for individuals and businesses in tax collection matters, including offers in compromise and installment agreements. He formerly was a tax consultant for one of the nation's largest accounting firms. He may be reached at (843) 656-4419 or by email at djohnson@turnerpadget.com.

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