By Anthony Diosdi
Introduction
I have been assisting clients with tax problems for nearly twenty years. One question that I was always asked is,’Can the Internal Revenue Service (“IRS” or “Service”) stop me from traveling abroad?’. Up until fairly recently, I advised clients that the IRS could not prevent them from traveling abroad. That all changed in 2015 with the passage of Fixing America’s Surface Transportation Act (“Fast Act”). The Fast Act requires the State Department to deny a passport application by, and authorizes it to revoke the passport of, any individual that the Service certifies as having a “serious delinquent tax debt.” See Fixing America’s Surface Transportation Act, Pub. L. No. 114-94, Section 32101(e), 129 Stat. 1311, 1732 (2015). Internal Revenue Code Section 7345 governs the IRS’ certification process and provides taxpayer’s a limited right to judicial review.
What Constitutes a Seriously Delinquent Debt?
Internal Revenue Code Section 7345(b)(1) sets forth the elements of a “seriously delinquent tax debt.” First, a “seriously delinquent tax debt” is an unpaid, legally enforceable federal tax liability of an individual. The term does not include non-tax liabilities collected by the IRS such as criminal restitution, FBAR penalties, state tax liabilities, or past-due support payments. Second, the tax liability must be assessed. This means that proposed assessments in an audit which have not been finalized cannot be classified as “serious delinquent tax debt.” Third, the liability must exceed $50,000. (This amount is indexed for inflation each year. See IRC Section 7345(f). For 2019, the amount is $52,000). This requirement is met if the total amount of all federal tax liabilities assessed against an individual (including assessed penalties and interest) exceeds the dollar-amount threshold. Finally, the IRS must have filed a notice of federal tax lien under Internal Revenue Code Section 6323 (with the taxpayer’s Collection Due Process (“CDP”) rights under Section 6320 having lapsed or been exhausted) or made a levy under Section 6331 with respect to the liability. See IRC Section 7345(b)(1)(C).
Internal Revenue Code Section 7345(b)(2) lists two exceptions to the term “seriously delinquent tax debt;” a liability being paid in a manner pursuant to an installment agreement under Section 6159 or an agreement under Section 7122 (an agreement under Section 7122 may include an offer in compromise accepted by the IRS or a settlement reached between the Department of Justice and the taxpayer) and a liability for which collection has been suspended because the taxpayer requested either a CDP hearing under Section 6330 or innocent-spouse relief under Section 6015. In addition, certification will be postponed while an individual is in active military service in an area designated as a combat zone or participating in a contingency operation. See IRC Section 7345(b)(2). There are several discretionary exceptions, which the IRS could later modify, eliminate or add addition exceptions. Currently, the following are discretionary exceptions:
1. The debt is currently not collectible due to hardship.
2. The debt resulted from identity theft.
3. The taxpayer is in bankruptcy.
4. The taxpayer’s application for an installment payment agreement or offer in compromise is pending.
How Does the IRS Determine if a Federal Liability is a “Seriously Delinquent Tax Debt” and what is the Procedure to Notify a Delinquent Taxpayer of a “Seriously Delinquent Tax Debt?
In identifying a “seriously delinquent tax debt,” the IRS will rely on its transcripts (“modules”) on an individual’s account with an unpaid assessed tax liability to identify a “seriously delinquent tax debt.” According to a Notice issued by the Office of Chief Counsel
“once all eligible modules have been identified, the systems will aggregate the amount
of unpaid liabilities. If the total is more than the statutory threshold, the taxpayer will
be identified as having a seriously delinquent tax debt, and Transaction Code (“TC”)
971 Action Code (“AC”) 641 will post to each module.” See Office of Chief Counsel
Notice CC-2018-005 April 5, 2018.
Although the Office of Chief Counsel April 5, 2018 Notice states that the IRS will certify tax liabilities as “seriously delinquent tax debt” by automatically aggregating a taxpayer’s back tax liability, some taxpayers that owe the IRS more than $52,000 will avoid being certified as “seriously delinquent.” The IRS will only certify tax liabilities that have been assessed. Below is an example how a taxpayer who owes more than $52,000 can avoid having his tax debt being certified by the IRS.
Suppose a taxpayer owes the IRS a total of $75,000. This debt consists of a 2014 tax liability of $45,000. The remaining $30,000 consists of interest and penalties which has yet to be assessed.
In this example, even though the taxpayers owes the IRS $75,000 for the 2014 tax year, since the IRS has not assessed $30,000 in interest and penalties against the taxpayer in its modules, the taxpayer’s assessed liability is only $45,000 ($75,000 (total tax) – $30,000 (unassessed interest and penalties) = $45,000) for purposes of certifying the tax. Since the taxpayer’s 2014 tax assessed tax liability is below the $52,000 threshold (2019 threshold as per IRC Section 7345(b)(1)(B)), the 2014 tax liability will not be certified as a “seriously delinquent tax debt.”
Once the transcripts have been coded as seriously delinquent by the Service, it will notify the State Department. After the State Department receives notice from the IRS, it will not issue a new or renewed passport to a certified individual may revoke a previously issued passport, except for return travel to the United States. See FAST Act Section 32101(e)(1)(A) and (2). Contemporaneously with the certification, the IRS will notify individuals of their certification by sending them a Notice CP 508C by regular mail to the individual’s last known address. (It should be noted that the IRS is not required to mail the Notice CP 508C by certified mail or even provide a copy of the Form CP 508C to a delinquent taxpayer’s attorney or authorized representative). The Notice CP 508C should list the tax liabilities giving rise to the certification. The notice should also identify tax periods at issue and type of liabilities (i.e., income or trust fund recovery penalty). Finally, the Notice CP 508C should inform the individual receiving the notice of the right to seek review in a federal district court or the United States Tax Court.
How the Administrative Procedure Act Can be Utilized in a Passport Litigation Cases
Administrative agencies such as the IRS are created by Congress to carry out certain statutory defined duties, goals and functions. Administrative agencies are subject to judicial review to ensure that they do not go beyond their statutory powers in carrying out their tasks. If an agency such as the IRS could freely take actions that were ultra vires, that is, beyond its statutory authority, its decisions would completely undermine the separation of powers principles upon which the Constitution is based. The basic purposes of judicial review set forth above are embodied in the Administrative Procedure Act (“APA”) Although judicial review serves as an important check on the legality of an action that an agency such may undertake, there are significant limitations on a court’s ability to review a federal agency’s actions. These limitations significantly impact a court’s ability to review an IRS passport certification case.
Internal Revenue Code Section 7345(e)(1) provides that any individual who has been certified by the IRS may bring a civil action to determine whether the certification was erroneous or should be reversed. The action may be filed in either the United States Tax Court or a federal district court (with proper venue). If a court determines that a certification was erroneous or should be reversed, it may order the IRS to notify the State Department of the erroneous certification.
It is anticipated that most individual taxpayers who receive Notice CP 508C will likely raise the two challenges in court. First, individual taxpayers will attempt to contest the tax stated on the Notice CP 508C. Second, individual taxpayers who receive a Notice CP 508C may attempt to challenge the scope and standard of review in their certification action.
Let’s take a closer look at these potential challenges. The first and probably the most common challenge in IRS certification cases will be for taxpayers to contest the underlying liabilities stated on a CP 508C. Unfortunately, most individuals attempting to contest certification by challenging the underlying liabilities listed on a Notice CP 508C will be disappointed. This is because Section 7345 does not waive the Government’s immunity to liability challenges. As a general rule, the United States cannot be sued in court to contest a tax liability unless there is a specific waiver of sovereign immunity that is granted by Congress. See United States v. Dalm, 494 U.S. 596, 608 (1990). With that said, most rules are riddled with exceptions. The sovereign immunity bar on litigation is no different. The APA provides a waiver of sovereign immunity when two prerequisites are met.
“First, the action in question must “seek relief other than money damages and state
A relief other than money damages and stating a claim that an agency or an officer or
Employee thereof acted or failed to act in an official capacity or under color of legal
authority. See 5 U.S.C. Section 702. Second, the plaintiff must show that (1) review of
The agency action in question is authorized by a substantive statute or (2) review is
Made of a final agency action for which there is no other adequate remedy in the
Court.” See Bowen v. Massachusetts, 487 U.S. 879, 891-93 (1983).
A litigant may invoke the APA as a waiver of sovereign immunity if he or she can satisfy both of the above tests. See Blagojevich v. Gates, 519 F.3d 370, 372 (7th Cir. 2008). Does this mean that an individual who received a Notice CP 508C can utilize the APA to challenge a certified liability? The answer to this question is an unequivocal no. The APA cannot be utilized to challenge a tax liability because such challenge would have the effect of restraining the collection of an assessed tax or demanding an award of money damages.
Although the APA cannot be utilized by a litigant to contest a tax liability, the APA can be utilized the challenge the process of certifying a tax liability. 5 U.S.C.A. Section 706(2)(C) gives courts the power to focus on what agencies do and to set aside agency action found to be “in excess of statutory jurisdiction, authority, or limitation, or short of statutory right.” Pursuant to the APA, courts can set aside an IRS action it is found to be “arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law.” See 5 U.S.C.A. Section 706(2)(A). In playing such a role, courts generally give agencies board leeway. In most cases, courts do not substitute their judgment for that of the agencies, but rather presume substantive agency results to be reasonable. Courts recognize that a decision of an agency like the IRS may be reasonable even if it is one that a judge would not make herself.
Because federal agencies are provided considerable deference in their decision making, a person challenging an IRS certification has the greatest probability of success if she can argue that essentially no evidence supports the decision. A court will have little trouble reversing a decision to certify a tax liability which is totally unsupported by any evidence. For example, a court should have little difficulty ordering the Service reverse a certification if a tax certified which is not reflected in an IRS official transcript. Unfortunately, most certification cases will be far more complicated. There will likely be a number of individuals issued Notice CP 508Cs that should have had their taxes resolved through a discretionary exception such as either an offer in compromise, installment payment agreement, hardship deferral, or innocent spouse relief, but were erroneously rejected by the IRS.
In these cases, individuals should be prepared to demonstrate that the IRS’ certification of a tax liability was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” This may be done by demonstrating that an individual met all the basic criteria of one of the discretionary exceptions to Section 7345 through detailed evidence such as logs of conversations with IRS Revenue Officers and Appeals Officers. The logs should also provide an itemization of the documentation and information given to the IRS.
If an individual receives a Notice of Intent to Levy and Right to Request a Hearing, it critical that a written request for a CDP hearing is timely filed. If possible, a proposed resolution for a tax liability should be communicated to the IRS Appeals Officer during the hearing. If possible, the hearing should be recorded in some form.
Detailed records of communications with IRS employees (both informally and during administrative hearings) may provide the evidence which demonstrates that the IRS’ actions were arbitrary and capricious. This type of evidence will be extremely valuable in an APA certification litigation case.
Conclusion
The best way for any individual to avoid losing their passport is to make sure that their tax debt remains below $52,000. If an individual taxpayer owes more than $52,000, the resolution will depend on the facts and circumstances of the particular individual. When a taxpayer owes more than $52,000, they should first determine if he or she can reduce the assessed liability below $52,000. If an assessed federal liability cannot be reduced below $52,000, as soon as practically possible, the individual must attempt to resolve their tax liabilities through either an offer in compromise, installment payment plan, hardship deferral, or if possible through innocent spouse relief. If an individual is not able to come to an agreement with the IRS, he or she should consider taking the case to court. However, in order for such litigation to be successful, it is extremely important that an individual documents all their interactions with the IRS. This may mean the difference between keeping or losing a passport.
This article provides guidance to individuals who owe more than $52,000 in back tax liability and are concerned with losing their passports. Given that this is a new area of litigation and there are still many unanswered questions. Anyone concerned about losing their passport to the IRS and is faced with a federal tax liability that exceeds $52,000 should consult with a lawyer well versed in tax litigation.
Anthony Diosdi concentrates his practice on tax controversies and tax planning. Diosdi Ching & Liu, LLP represents clients in federal tax disputes and provides tax advice throughout the United States. Anthony Diosdi may be reached at 415.318.3990 or by email: Anthony Diosdi – adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.