In late 2015, Congress passed the Fixing America’s Surface Transportation Act, a law that, among other things, helps the IRS collect larger tax debts. Included in the FAST Act is Section 7345 of the Internal Revenue Code, which requires the IRS to provide information to the U.S. State Department about people who owe “seriously delinquent tax debt.” Then, the State Department can deny, revoke or limit the ability of these individuals to use their passports – until they are back in good standing with the IRS.
The law was effective on the day Congress passed it, but given the complexity of implementing it, the IRS needed time to work out the details. Now, the IRS is ready to start the program in late March.
For most people, the passport restrictions remain a mystery, largely because Treasury regulations haven’t been published that explain how the IRS will conduct the program. Recently, the IRS provided some early indications of how it will administer the program. The IRS hasn’t updated its Internal Revenue Manual, and the State Department hasn’t provided any information on specific passport rules. The IRS promises more information in the next few months.
Here are the 10 most pressing questions and answers about the upcoming passport restrictions.
1. What is the new passport-restriction program (IRC Section 7345)?
IRC Section 7345 requires the IRS to identify and “certify” individuals who have “seriously delinquent tax debt,” and provide this certification to the State Department. In turn, the State Department can deny, revoke, or limit use of the individuals’ passports until they get into good standing with the IRS.
2. Why did Congress create passport restrictions?
In 2011, the Government Accountability Office issued a report that examined the potential for using passports to increase tax-debt collection. The report found that 224,000 people who owed collectively more $5.8 billion in unpaid federal taxes received passports in 2008.
The report recommended that Congress enable a more coordinated effort between the IRS and State Department to go after these unpaid taxes, using passports as leverage. The report received a lot of national press, and the link between federal tax debt collection and passports became law in 2015.
3. Who is affected?
The passport restriction will affect people who travel internationally and owe seriously delinquent tax debt. This includes people with passports and those applying for or renewing passports.
Who is an individual with seriously delinquent tax debt? Section 7345 defines this person as owing a legally enforceable tax liability of more than $50,000 (unpaid taxes, penalties and interest combined), with:
- A lien filed, and all administrative remedies for lien relief have lapsed or been denied; or,
- A levy issued.
There are certain exceptions. The IRS won’t consider people in the following situations to be individuals with seriously delinquent tax debt, because these people are in good standing with the IRS:
· People who are in an IRS installment agreement to pay their taxes. Based on IRS data, most taxpayers affected by passport restrictions will avoid or release the restrictions by establishing installment agreements with the IRS to pay their tax bills. In 2015, taxpayers established almost 3 million installment agreements.
Right now, it’s unclear whether the IRS will allow other types of agreements to release taxpayers from passport restrictions. Two other arrangements the IRS could allow include deferred payment because of economic hardship (called currently not collectible, or CNC, status), or partial-pay installment agreements
But it’s unclear whether the IRS will count people in these agreements as being in good standing, because the agreements don’t cover the entire tax bill. It’s also unclear whether the IRS will allow taxpayers to get back into good standing with extension-to-pay agreements, which give taxpayers 60 or 120 days to pay their tax bills in full. If the IRS does allow extensions-to-pay to release taxpayers from seriously delinquent tax debt status, this could mean a simple fix to passport restrictions.
Remember that Section 7345 and the IRS have not specifically stated whether CNC status, partial-pay installment agreements, or extensions to pay count as exceptions for taxpayers who would otherwise be considered individuals with seriously delinquent tax debt. We should expect more clarity about these options in the near future.
· People who have settled their debt through an offer in compromise or Justice Department agreement. Taxpayers who may qualify and can pay an offer in compromise settlement should consider applying now to get the process started before passport restrictions start in March. However, this won’t be a common exception; in 2015, taxpayers submitted about 67,000 offers in compromise, and the IRS approved only 27,417.
· People who appeal a levy through an IRS collection due process hearing. Congress wants to allow taxpayers to finish appealing their cases before the government imposes passport restrictions. As such, taxpayers who are arguing a levy action through a CDP hearing won’t be certified as individuals with seriously delinquent tax debt until their hearings are completed.
Levies are normally triggered after taxpayers receive a final notice of intent to levy (usually, IRS letter LT11 or L1058). Taxpayers must file for a CDP hearing within 30 days of receiving this notice. CDP hearings are an effective last step for taxpayers who want to get in good standing with the IRS by establishing a payment agreement or contesting the taxes and penalties.
· People who request innocent spouse relief (Form 8857). This won’t be a common exception. The most recent IRS data from 2003 to 2006 shows that taxpayers file only a few thousand Forms 8857 annually, to get relief from a joint tax debt.
Based on this list of exceptions, the way to avoid being certified by the IRS as an individual with seriously delinquent tax debt is to get into an agreement with the IRS to pay the balance.
4. What will happen to the person who owes seriously delinquent tax debt?
Starting in late March, the IRS will send Letter 508C, Notice of certification of your seriously delinquent federal tax debt to the State Department, to the taxpayer’s last-known address to notify the taxpayer that they are certified as owing seriously delinquent tax debt. At that time, the IRS will also send the certification to the State Department.
The State Department then has the authority to deny issuance or renewal of a passport, or fully restrict or limit its use. The State Department will notify the taxpayer in a separate letter about the passport restrictions.
Before the State Department revokes a passport, the State Department may limit the passport so that the individual can only travel back to the United States. It’s unclear how the State Department will use its discretion on limiting and revoking passports.
However, when taxpayers are applying for or renewing a passport, the FAST Act requires the State Department to deny the passport to any individual with seriously delinquent tax debt. Per the IRS Web site, before denying the issuance of a passport, the State Department will hold the passport application for 90 days to allow the taxpayer to:
- Resolve any erroneous certification issues;
- Pay the tax debt in full; or,
- Establish a payment alternative with the IRS
Taxpayers won’t get a similar grace period for resolving the debt before the State Department revokes a passport.
5. How can taxpayers get their passport restrictions lifted?
To get out of the passport restriction, individuals must get back into good standing with the IRS. For most taxpayers, that will mean paying the entire tax bill or, more likely, setting up an installment agreement with the IRS.
After taxpayers get into good standing, the IRS will send the decertification list to the State Department, which then lifts the passport restrictions. The IRS will also reverse the certification within 30 days.
6. Can taxpayers just pay the balance to under $50,000 to remove the certification and passport restrictions?
The short answer from the IRS is no. Just reducing the amount under $50,000 will not decertify the taxpayer. The key is to get into good standing – that is, individuals certified as having seriously delinquent tax debt must either pay the entire balance or set up a payment agreement with the IRS.
Two quick collection alternatives come to mind. First, the quickest way to remove passport restrictions could be paying the balance to under $50,000 and setting up a streamlined installment agreement for the rest (payment terms up to 72 months).
Second, taxpayers who owe between $50,000 and $100,000 can use the new IRS expedited installment agreement process to quickly get in good standing with the IRS. Taxpayers who owe more than $100,000 can pay the balance down to under that amount to get into this special 84-month payment plan. Otherwise, taxpayers who owe more than $100,000 or need terms longer than 84 months must file detailed collection information statements (Form 433 series) with the IRS and wait for the IRS to approve their installment agreement. This process can take months, which will also mean extended passport restrictions until the IRS approves the agreement and decertifies the taxpayer.
7. Can taxpayers appeal their seriously delinquent tax debt certification?
Under Section 7345(e), taxpayers can appeal their status in federal district court or U.S. Tax Court. But the taxpayers’ passports will remain restricted while they appeal.
Expect further legislative and administrative remedies to allow taxpayers to contest their status at the same time they learn about passport restrictions. One reason we should see these additional remedies is the uncertainty of international mail. Many taxpayers may not be receiving IRS letters about their unpaid taxes. In fact, they may first find out about their passport restrictions when they try to travel to another country or return to the United States. A 2015 Treasury Inspector General for Tax Administration study reported that the IRS had no idea whether U.S. taxpayers living abroad had received the 855,000 notices it sent.
For taxpayers who are surprised by their passport restrictions when they try to travel, the best way to expedite travel is to obtain a quick installment agreement.
8. What if taxpayers don’t think they owe the tax?
Here, taxpayers are in a pickle, because time is of the essence. For example, if the IRS assessed tax on an unfiled return (that is, the IRS filed a return for the taxpayer, called a substitute for return), or through a completed audit or underreporter inquiry, there’s not much the taxpayer can do to quickly contest the tax assessment and remove the seriously delinquent tax debt certification. Filing an original return or contesting the tax through IRS administrative options or courts may take a long time.
To get immediate relief, the only quick option is for taxpayers to pay the balance, or more likely, set up an installment agreement, and contest the tax later with the IRS.
Again, recent IRS changes to installment agreements for people who owe between $50,000 and $100,000 may also help. These rules streamline the process to set up an installment agreement and would help cut down on the wait time to get passport restrictions lifted.
9. Is there an expedited process to remove passport restrictions?
Right now, there’s no provision to expedite removal of passport restrictions after a taxpayer gets in good standing with the IRS. After the service removes an individual’s certification, the IRS must notify the State Department within 30 days to release passport restrictions. If the tax debt is determined to be erroneous, the IRS has an undefined “reasonable time” to notify the State Department. As the law is implemented, look for the IRS and the State Department to develop expedited procedures to relieve taxpayer burden.
10. What can a seriously delinquent tax debtor do to avoid passport restrictions?
Basically, taxpayers can avoid passport restrictions by meeting an exception outlined above – all of which mean getting into good standing with the IRS.
Next steps for taxpayers affected by passport restrictions
Owing taxes without being in an arrangement with the IRS to pay them has bad consequences for any taxpayer. That’s why all taxpayers, regardless of passport restrictions, should arrange to pay their unpaid balances.
Starting in March, taxpayers who think that they may be subject to passport restrictions because of tax debt can call the National Passport Information Center at (877) 487-2778.
And taxpayers who want to avoid or remove passport restrictions should contact a tax professional or call the IRS to set up an agreement on their balances right away: (855) 519-4965 for domestic calls, (267) 941-1004 for international calls.
Stay tuned for more information from the IRS on passport restrictions in the next couple months.