IRS Passport Revocation
Recently, the Internal Revenue Service was given a new power – IRS Passport Cancellation Power under new legislation to deny, rescind, or limit a passport of anyone who owes the IRS more than $59,000 (adjusted for inflation). This threshold amount includes both taxes, interest and penalties. From a practical perspective, this threshold dollar amount is not difficult to amass for the average self-employed or high-income taxpayer who can have tax rates close to 50% once social security taxes are factored in, or individuals with significant income. From my perspective, if the Internal Revenue Bulletin: 2018-3 was limited to criminal matters, it would make more sense.
The good news, is that the IRS will not rescind or hinder the ability of an individual to have a passport where 1) that individual has entered into an installment agreement with the IRS to pay the back taxes, 2) for tax debts being paid through an offer in compromise, 3) if the taxpayer is contesting the tax liability in Court or an administrative proceeding, or 4) a few other reasons such as bankruptcy, or requesting innocent spouse relief, among others. This new legislation will be under section 7345 of the tax code, called “Revocation or Denial of Passport in Case of Certain Tax Delinquencies.” Therefore, IRS Passport Cancellation Power does have some limits
While different from New York States revocation of a taxpayer’s driver’s license if they owe NYS taxes, it is very troubling nonetheless in that it restricts the ability to travel due to the tax debt (or in NY’s case simply drive) which can directly impact a person’s ability to generate income to pay for their tax obligation. I doubt this legislation will cause delinquent tax collections to rise dramatically and may have the unfortunate impact of hurting taxpayers who are already hurting economically.
In December 2017, the IRS started to formally begin the process of certifying to the US Department of State which taxpayers owed more than $59,000 (which will be adjusted for inflation) to the IRS, by collecting that information from their computer systems and verifying it.
When will the IRS revoke your Passport?
Under IRC Sec 7345, of the Internal Revenue Code, if a taxpayer has seriously delinquent income or payroll tax debt, this law causes the IRS to tell the State Department of the tax debt, and the State Department will generally not issue a new or renew a passport to the affected taxpayer, and may revoke your current passport (currently its rare they do this), once they get this notice from the Internal Revenue Service. Though rare, if the revocation occurs when you are overseas, the State Department, in its discretion, may issue a temporary passport so you can still enter back into the United States.
As mentioned before, the definition of seriously delinquent tax debt under this rule is tax debt greater than $59,000 (including interest and penalties), and for which a Notice of Federal Tax Lien or Tax Levy has been issued, and all administrative remedies to contest the tax law have been exhausted. These taxes are also limited to Title 26 taxes, Trust fund recovery penalties, business taxes for which the taxpayer is personally liable, so items like FBAR penalties and collecting child support arrears would not count toward the $59,000 amount. The other very important exceptions to this rule are if you have 1) a valid installment agreement, 2) filed an offer in compromise and it was accepted and you are making the payments, and 3) the collection process has stopped since you filed for innocent spouse relief, among other exceptions.
Before the State Department denies the passport, they will give 90 days to 1) make full payment of the tax debt or enter into a IRS payment plan (notice that entering into an installment agreement appears to be enough to stop the process), 2) resolve an error by the IRS that you owe them. The IRS will not reverse the certification if you bring the tax debt below $59,000, you need to show its been fully paid or is not seriously delinquent (through a payment plan or OIC). The IRS has thirty days to contact the State Department that the tax debt issue has been resolved with a payment plan or some other arrangement. The IRS will mail you a form Notice CP 508R when it reverses its certification.
Notification of the Taxpayer
The IRS will notify taxpayers about this issue by sending them via regular mail a Notice CP 508C. Its very important that if this issue affects you that you take action quickly since the IRS does not act quickly, and it will take time to resolve this tax issue. Under IRC Section 7345 law, the State Department cannot be held liable for errors by the IRS. If the IRS makes a mistake in this process, the first step would be to appeal to them to fix the issue. If this is not successful, the next step would be to go to the IRS Taxpayers Advocates office. If this is not successful, you can file suit in the US Tax Court or US District Court to have the court determine if the IRS made a mistake.
Imminent Travel Plans
For taxpayers who have the tax debt issue, and want to travel within the next 45 days, the IRS will allow entering into a payment plan and then quickly notify the State Department that the issue has been resolved, so it is possible to correct the issue with quick action by showing proof of travel and having an open passport application request. This expedited process will shorten the normal 30 days to usually 1-2 weeks.