6th February 2020
Rufus Rhoades (Rufus v. Rhoades)
This article by Rufus Rhoades from MSI's specialist member firm Rufus v. Rhoades talks about the relatively new law (IRC § 7345 “Revocation or denial of passport in case of certain tax delinquencies” which implements a law called the “FAST Act”) that allows the Department of State (“State”) to not renew or, perhaps, revoke the passport of a “seriously delinquent” taxpayer.
How’s this for a nightmare? Sarah is home with the children while her husband is on a business trip to Europe. One morning, the day before he is due to return, she receives a frantic call from him during which he tells her that he can’t get home because his passport has been revoked! So, there he is, stuck in Europe without a passport. Possible? You bet.
Under the law mentioned above, the IRS has the authority to certify to State that a taxpayer has a “seriously delinquent” tax debt. One of two results arises from that certification: a) State shall not issue [or renew] a passport to that taxpayer or b) State may revoke the taxpayer’s passport. That can be a pretty serious penalty, especially if the revocation occurs while the taxpayer is out of the country.
What is “Seriously Delinquent”?
The good news is that the phrase “seriously delinquent” means something more—actually, a good deal more—than just that you owe tax. To fall into the “seriously delinquent” category, your tax (including penalties and interest):
Note that you need not be concerned about the above requirements unless you have already been in contact with the IRS about your debt and it has informed you that a notice of lien has been (or will be) filed or a levy against you has occurred or will occur.
That raises the question of how does one know whether or not the IRS has assessed a tax against the taxpayer? A taxpayer who is attempting to determine just how much has been assessed against him is entering a briar patch. The easiest way for a taxpayer to determine what has been assessed is to ask for professional help because an accountant can obtain what is called a transcript of a taxpayer’s account relatively easily. The individual taxpayer can also obtain that transcript, but she will need to go through a number of steps (which can be frustrating and time consuming) to do that. An accountant will have already gone through those steps.
Once you have the transcript, you will have all of the relevant information about yourself that the IRS has, including how much you owe (which will include interest and penalties) and how much has actually been assessed against you. The transcript will also tell you whether or not the IRS has issued a tax levy against you.
Even if you are “seriously delinquent,” you will be excluded from the passport suspension program under any one of a number of circumstances:
Let’s assume, however, that you do not fall under one of the above (or certain other limited) exceptions and have a major tax obligation. Even if you and the IRS have had that discussion, the IRS still needs to follow certain procedures if it issues a certification that you are “seriously delinquent.” The most important procedure is to deliver to you Notice CP508C (“Notice of certification of your seriously delinquent federal tax debt to the State Department”).
You Receive the Notice
Once the IRS determines that you have a “seriously delinquent” tax debt, it will more likely than not certify that determination to State. Based on that certification, State will deny any passport application or renewal request you may submit so long as the certification remains in place. Additionally, State may (but is not required to) revoke your current passport, possibly, as I mentioned before, leaving you stranded in a foreign country. Since revocation of a taxpayer’s passport is discretionary with State, one may wonder what the standards are that State weighs to make the decision to or not to revoke. State has not published those standards, so I, as you, am in the dark about what would trigger an actual revocation.
When the certified “seriously delinquent” taxpayer applies for a new passport or renewal of an old one, State will hold the application for 90 days in order to allow the taxpayer time to pay the tax or make some payment arrangements that the IRS accepts. After that time, assuming that the taxpayer does not resolve the tax issue, the taxpayer is trapped in the U.S. until he does resolve it.
Getting Your Passport Back
Once you are certified (and you conclude you either can’t fight the certification or you don’t have the resources to do so), your only recourse is to take action to have the IRS cancel the certification. To do that, you need to either pay a significant enough portion of the tax debt to drop you off the “seriously delinquent” list or enter into some form of agreement with the IRS that has the same effect. I listed those types of agreements above.
The de-certification process is supposed to begin as soon as you resolve your tax debt with the IRS. How long the process to actually get the certification lifted will take is anyone’s guess at this point because the whole program is so new. Suppose that the IRS takes 45 days to notify State that you are no longer certified. Once that is done, State needs to go through what it does to have your name removed from its “seriously delinquent” taxpayer records. That time frame is probably another 45 days, more or less. Those numbers mean that you are probably looking at about a 90 day wait, once you’ve qualified for decertification.
Let’s assume that you are one of those unfortunate persons who is abroad when State revokes your passport. Under 22 USC § 2714(e)(2)(B), State may issue you a limited passport designed to allow you to return to the United States, but which will not be valid for any other travel. Even obtaining that limited passport will take time, so avoiding being in that position is probably a good plan.
Suppose the IRS certifies you to State and the IRS is wrong. I know that sounds absurd, suggesting that the Government might make a mistake, but it does happen. If it happens to you, life will get a bit sticky because your only remedy is to sue the IRS in the appropriate District Court. Not only is that an expensive remedy, but it is also time consuming and time is frequently what an active business person does not have. Given where things stand now, the taxpayer should at least reach out to the IRS informally prior to suing and attempt to get it to reverse its position. That action is not required as a condition to filing the law suit, but it does make sense to try because even IRS employees are sometime persuaded by the facts.
So, let’s go back to Sarah. If she does get that phone call, she needs help. What she does will not necessarily depend on whether or not the IRS classified her husband (and her, assuming joint returns) correctly. What she wants is her husband back, so that means dealing with State. The tax issue can come later. According to a phone call I had with a representative of State, Sarah’s husband will need to visit the U.S. embassy in the country where he is calling her from and ask for a limited passport. The person at State with whom I spoke had no idea how long Sarah’s husband is going to wait to obtain it.
Rufus v. Rhoades provides tax consulting to law firms, accounting firms, and international trust companies. He specializes in international tax, foreign tax issues, non-resident issues, and provides expert testimony for international taxation matters.
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