Hold on to your horses. The IRS recently adopted new procedures required under a 2015 law designed to clamp down on taxpayers with “seriously delinquent tax debts.”
On January 16, 2018, the IRS issued Notice 2018-1, which has all of the bite of the execution of “Order 66,” an order implanted into the clones by the Sith Lords and Kaminoan scientists at the end of the Clone Wars in which the clone troopers turned against their Jedi commanders and terminated them, bringing about the destruction of the Jedi Order.
https://youtu.be/5c7jNYpPFzE
While Notice 2018-1 doesn’t give rise to the same doomsday scenario as the “Clone Wars,” it nevertheless can wreak havoc on your freedom of movement, which was judicially recognized as a fundamental constitutional right by the United States Supreme Court in the landmark case of Paul v. Virginia, 75 U.S. 168 (1869) (I smell a constitutional challenge brewing). Ironically, the Supreme Court did not invest the federal government with the authority to protect freedom of movement but that is a story for another day. Notice 2018-1 provides guidance for the implementation of newly enacted IRC 7345, added by Section 32101 of Fixing America’s Surface Transportation (FAST) Act. This legislation requires the IRS to notify the Department of State of taxpayers who have “seriously delinquent tax debts.”
The purpose of such notification is not so the taxpayer can be entered into a drawing for a three-day cruise aboard the Disney “Magic.” On the contrary, receipt of section 7345 certification triggers a parade of horribles. Upon receipt of a section 7345 certification, the State Department is generally required to (1) deny a passport application for taxpayers, (2) revoke an existing passport, or (3) limit passports previously issued to these taxpayers. The notice also describes exceptions to certification and remedies that taxpayers can avail themselves of.
This comes on the heels of a January 10, 2018 “Report of The National Taxpayer Advocate” by Nina Olson imploring the Internal Revenue Service (IRS) not to abuse its new power to revoke the passports of U.S. citizens who owe more than $ 50,000 (USD).
Now for the nuts and bolts. Let’s begin with the definition of the ubiquitous phrase, “seriously delinquent tax debt.” Under section 7345(b)(1), a “seriously delinquent tax debt” is an unpaid, legally enforceable, and assessed federal tax liability of an individual, greater than $50,000, and for which:
- A notice of federal tax lien has been filed under section 6323, and the taxpayer’s right to a hearing under section 6320 has been exhausted or lapsed; or
- A levy has been issued under section 6331.
Pursuant to section 7345(f), the $50,000 amount is adjusted for inflation each calendar year beginning after 2016.
The $50,000 federal tax liability threshold is calculated by aggregating the total amount of all current tax liabilities for all taxable years and periods meeting the above criteria (including penalties and interest) assessed against an individual.
Just as important as knowing what a seriously delinquent tax debt is is knowing what a seriously delinquent tax debt isn’t. Under Section 7345(b)(2), a seriously delinquent tax debt does not include the following:
- A debt that is being timely paid under an IRS-approved installment agreement under section 6159;
- A debt that is being timely paid under an offer in compromise accepted by the IRS under section 7122;
- A debt that is being timely paid under the terms of a settlement agreement with the Department of Justice under section 7122;
- A debt in connection with a levy for which collection is suspended because of a request for a due process hearing (or because such a request is pending) under section 6330; and
- A debt for which collection is suspended because the individual made an innocent spouse election (section 6015(b) or (c)) or the individual requested innocent spouse relief (section 6015(f)).
Now for the skinny on the procedures. Under Section 7345(c)(1), the IRS has certain obligations. First, it must notify the State Department if the Commissioner reverses the certification on account of it being erroneous or if the debt attributable to such certification is fully satisfied, becomes unenforceable, or ceases to be a seriously delinquent tax debt. Upon receipt of a reversal of certification notice from the IRS, the State Department must remove the certification pertaining to that debt from the taxpayer’s record at the State Department.
Section 7345(c)(2) includes a timing element when it comes to the IRS notifying the State Department about a reversal. In the case of a debt that has been fully satisfied or has become legally unenforceable (such as when the collection statute of limitations has run under section 6502), notification under section 7345(c)(1) must be made no later than the date required for issuing the certificate of release of lien with respect to such debt under section 6325(a) (30 days after the day on which the liability is fully satisfied or legally unenforceable or following acceptance of a bond in full payment of the liability).
If an individual makes an election under section 6015(b) or (c) or requests relief under section 6015(f), notification under section 7345(c)(1) must be made no later than 30 days after such election or request. In the case of an installment agreement under section 6159 or an offer in compromise under section 7122, notification under section 7345(c)(1) must be made no later than 30 days after such agreement is entered into or such offer is accepted by the IRS. Finally, in the case of a certification that is found to be erroneous, notification under section 7345(c)(1) must be made as soon as practicable after such finding. In all other cases, notification must be made as soon as practicable.
On the due process front, taxpayers are entitled to notice that they are the subject of a certification or reversal of a certification. Specifically, Section 7345(d) requires the IRS to contemporaneously notify an individual when he or she is the subject of a certification or reversal of a certification. The notice must include a description in simple layman’s terms of the right to bring civil suit under section 7345(e). This notice is collectively referred to as Notice CP508C, “Notice of certification of your seriously delinquent federal tax debt to the State Department,” or in keeping with our “Star Wars” theme, “C-3PO” for short.
Judicial review is fair game. Section 7345(e) bestows upon taxpayers the right to judicial review on two seminal issues: (1) “Was the certification erroneous?” and (2) “Did the IRS fail to reverse a certification in either United States district court or in the United States Tax Court?” Thankfully, Section 7345(e) adds some teeth into a taxpayer-friendly ruling that the certification was erroneous, albeit with a soft bite. To the extent that a court finds the certification to be erroneous, it may order the IRS to notify the Secretary of State that the certification was erroneous. The operable or “feeble” word here is “may.”
Section 7345(g) states in no uncertain terms that a certification or reversal of a certification may only be delegated by the Commissioner of Internal Revenue to the Deputy Commissioner for Services and Enforcement, or the Commissioner of an operating division, of the IRS.
There is slight relief for taxpayers serving in an area designated as a combat zone or participating in a contingency operation. Section 7508(a)(3) prevents the IRS from certifying a seriously delinquent tax debt under section 7345 while an individual is serving in an area designated as a combat zone or participating in a contingency operation.
In addition to the statutory exceptions set forth in section 7345(b)(2) and section 7508(a), the Internal Revenue Manual (IRM) will be updated to include information about circumstances in which a tax debt is not subject to the certification process. This is the IRS’s way of wrapping this juggernaut up in a neat little bow. The IRS will continue to monitor the certification process after implementation and may update the IRM when necessary to meet the requirements of the program.
Despite such a draconian measure, there are ways to stop the IRS dead in its tracks from requesting the State Department to revoke your passport. Consultation with an experienced attorney will help you become aware of your rights.