Beginning January 1, 2018, the IRS will begin implementing Section 7345 of the Internal Revenue Code to certify tax debt to the State Department. This will allow the State Department to revoke or withhold the issuance of passports to delinquent U.S. taxpayers.
To warrant IRS certification to the State Department, the IRS debt has to be deemed “seriously delinquent tax debt.” This is defined as: (a) an amount exceeding $50,000, as adjusted annually for inflation and including penalties and interest; (b) a levy or notice of federal tax lien has been issued by the IRS; and (c) all administrative remedies, such as the right to request a collection due process hearing, have lapsed or been exhausted. This only relates to Title 26 of the United States Code and does not include other tax-related penalties, such as FBAR penalties.
The IRS will be required to notify the taxpayer in writing at the time it issues a tax debt certification to the State Department. Before denying a passport, the State Department will hold a passport application for 90 days to allow the taxpayer to resolve the tax debt or enter into a payment alternative with the IRS.
It is also possible to seek relief in U.S. Tax Court or District Court. The court can order the IRS to reverse the certification if it was erroneously issued, or was required to be reversed but the IRS failed to do so.
The certification will not apply or will be reversed in the following scenarios:
- The debt is paid in full. (The IRS will not reverse the certification if the taxpayer pays down the debt to an amount below $50,000.)
- The taxpayer enters into an installment agreement with the IRS to pay off the debt.
- The IRS accepts an offer in compromise to satisfy the debt, or the Justice Department enters into a settlement agreement with the taxpayer to satisfy the debt.
- Collection is suspended based on a request of innocent spouse relief, or for collection due process based on a notice of levy, but only if the request is with respect to the debt underlying the certification.
- The debt becomes unenforceable based on statute of limitations.
The law affects expatriates living abroad and individuals traveling regularly overseas for work. If the taxpayer finds himself or herself traveling or living outside of the country with a revoked passport, the Secretary of State has the discretion to limit the existing passport, or issue a limited one, for return travel to the United States.
It is not clear if this statute will ultimately pass constitutional challenges. In the meantime, starting January 1, 2018, you may be at risk of having your U.S. passport revoked if you travel outside of the U.S. without first addressing delinquent tax debts exceeding $50,000 through any administrative remedies and/or collection alternatives available to you.