Beruflich Dokumente
Kultur Dokumente
Debtors of Passports in
2018: New Guidance About
Code Sec. 7345 and Future
Tax Court Disputes
By Hale E. Sheppard*
I. Introduction
After several false starts, the IRS finally began implementing in January 2018 the
new passport-denial-and-revocation program for certain U.S. tax debtors. The
ability to restrict international travel as leverage to collect taxes derives from Code
Sec. 7345, a tax provision enacted by Congress way back in December 2015, as
part of the Fixing America’s Surface Transportation (“FAST”) Act.1 Generally, Code
Sec. 7345 authorizes the IRS, with the assistance of the U.S. State Department,
to revoke passport privileges of those taxpayers with a seriously delinquent tax
debt (“SDTD”). Depriving taxpayers of the ability to travel abroad for pleasure,
family, business, or other reasons will surely get their attention. It likely will result
HALE E. SHEPPARD, Esq. (B.S., M.A., J.D., in significant litigation against the IRS, too.
LL.M., LL.M.T.), is a Shareholder with Notwithstanding the pervasiveness and importance of this issue, the IRS has
Chamberlain Hrdlicka, Chair of the In- issued relatively little public guidance since Code Sec. 7345 was passed. There
ternational Tax Group, and a Member have been no proposed or temporary regulations, and no detailed Revenue Pro-
of the Executive Committee. cedures. This has left taxpayers and their advisors, at least until very recently, with
only the statutory language of Code Sec. 7345, a modest court order, probation, or parole that forbids departure
amount of legislative history, and information posted from the United States; (ii) owes more than $2,500 in child
(and periodically changed) by the IRS on its website. In support; (iii) has certain debts with the State Department;
December 2017, the IRS inserted valuable information (iv) has an outstanding felony warrant; (v) is subject to
in its Internal Revenue Manual, and, in January 2018, an extradition request; (vi) has been declared legally in-
issued Notice 2018-1. competent; or (vii) used a passport to cross a border and
This article analyzes the reasons why Congress decided to commit certain drug-trafficking crimes or sex-tourism
use passports to “encourage” tax payments, the function- crimes, and is imprisoned, on parole, or on supervised
ing of Code Sec. 7345, a long list of initial uncertainties release in connection with such crimes.5
identified by the tax community, avenues for taxpayers to With respect to the scope of the problem, the GAO
avoid or rectify SDTD status, and the new IRS guidance report indicated that, as of September 2008 (i.e., only three
announced in late 2017 and early 2018, just as the first quarters of the one year being studied), the State Depart-
batch of taxpayers are receiving notices that they have lost ment issued passports to more than 224,000 individuals
their ability to travel internationally. who collectively owed the IRS over $5.8 billion in federal
taxes.6 As with the estimate of the total “tax gap” of $330
II. Reasons for Leveraging Passports billion, the GAO emphasized that the $5.8 billion was
seriously understated because (i) the analysis did not cover
for Tax Payments all of 2008, (ii) the IRS can only gauge the underpayment
gap, not the non-filing gap or the underreporting gap,
The idea of depriving a tax debtor of a U.S. passport is (iii) it was impossible for the GAO to properly identify all
not new, but renewed focus on this possibility was trig- tax debtors because existing law did not permit the State
gered by a Government Accountability Office (“GAO”) Department to deny a passport solely because a taxpayer
report in 2011.2 lacked a Social Security Number (“SSN”), and (iv) the
The GAO report began by pointing out that the “tax general collection period for a federal tax debt is 10 years
gap” was, and continues to be, huge. Indeed, as of Septem- from assessment, such that the debt disappears from the
ber 2010, the total unpaid tax liability was $330 billion, records after that time.7 The GAO report summarized
and the GAO cautioned that this figure is significantly the shortfall in the following manner: “[T]he amount of
understated because the IRS only has partial data. The “tax tax debt for individuals currently holding U.S. passports
gap” has three elements: (i) the non-filing gap, which is may be in multiples of our $5.8 billion estimate for fiscal
made up of taxpayers who do not file Forms 1040 and do year 2008.”8
not pay income taxes; (ii) the underreporting gap, com- The GAO report also described certain individuals who
prised of taxpayers who file Forms 1040 but understate were granted passports in 2008, despite their unwilling-
the full amount of tax due; and (iii) the underpayment ness or inability to pay their tax debts. It identified a list
gap, into which fall those taxpayers who file accurate of individuals who were involved in abusive and possibly
Forms 1040 but simply fail to pay the corresponding criminal activity related to the U.S. tax system.9 The GAO
tax liability. The estimated “tax gap” of $330 billion was report noted the following discoveries from its investiga-
based solely on the underpayment gap, because the IRS tion: At least 14 passport recipients did not file Forms
is unable to realistically track the non-filing gap and the 1040 for one or more years; the IRS had filed a notice of
underreporting gap.3 Given the magnitude of the “tax gap” federal tax lien (“NFTL”) against the property of at least
and the many challenges that the IRS faces in collecting 20 passport recipients; and 10 or more passport recipients
unpaid taxes, certain congressional committees asked the had been indicted or convicted of violating federal laws
GAO to determine the amount of unpaid federal taxes (for distribution of controlled substances, making false
by individuals to whom the State Department issued a statements to the U.S. government, committing bank
passport in 2008 and to provide specific examples of these fraud, engaging in money laundering, etc.).10
types of individuals.4 The GAO report ultimately concluded that, in order
The GAO report clarified that, while the governing for the IRS to have a chance at collecting a larger portion
law at the time did not authorize the State Department of unpaid taxes, Congress should consider enacting new
to deny or revoke passports to individuals with unpaid legislation using U.S. passports as leverage:
taxes, it permitted such actions in a variety of other
circumstances. These included, but were not limited to, Federal law already allows the linkage of debt collec-
instances when an individual (i) is subject to a criminal tion with the passport issuance process in certain areas,
If the Secretary [of the Treasury] receives certification 3. Decertification of SDTD Status
by the [IRS Commissioner] that an individual has a SDTD status is not necessarily permanent; the law allows
[SDTD], the Secretary [of the Treasury] shall transmit for reversal of the SDTD certification in certain situations,
such certification to the Secretary of State for action which some refer to as “decertification.” The IRS must no-
with respect to denial, revocation, or limitation of a tify the State Department in three circumstances: (i) if any
passport pursuant to the … FAST Act. certification is found to be erroneous; (ii) if the individual
“fully satisfies” the debt that triggered the certification; or
In plainer English, the general rule is that, if the IRS (iii) if the debt is no longer an SDTD as a result of Code
determines that an individual taxpayer has an SDTD, Sec. 7345(b)(2), as described in the preceding paragraph.15
then it will send a “certification” to the Secretary of the In other words, notice of “decertification” must occur
Treasury, who, in turn, will send the “certification” to the when the original certification was unwarranted, the
Secretary of State, who then will deny, revoke, or limit the individual completely pays off the SDTD, the individual
U.S. passport of the individual, as appropriate. enters into an Installment Agreement, the individual
resolves matters through an Offer-in-Compromise, or
2. Definition of SDTD the individual has properly sought innocent spouse relief
The term SDTD generally means (i) a federal tax liability, from the liability.16
(ii) which has been assessed, (iii) which remains unpaid, Given the importance of ridding SDTD status
(iv) which is more than $50,000, and (v) with respect to swiftly, Congress provided details about how quickly the
FEBRUARY–MARCH 2018 39
decertification process must occur. It decided that the B. Related Tax Provisions
appropriate timeframe would be dictated by the grounds In addition to creating Code Sec. 7345, the FAST Act
on which the decertification is carried out. There are three also introduced or modified several other tax provisions,
different standards here. In cases involving erroneous certi- most of which are examined below.24 It is noteworthy that
fications, the IRS must notify the Secretary of the Treasury the last three items were not codified, which means that
“as soon as practicable” after discovering the problem. taxpayers and practitioners ordinarily would be unaware
For situations where the taxpayer fully pays the SDTD of them, unless they were to read the original legislation
or it becomes legally unenforceable (presumably because (i.e., the FAST Act) or its legislative history.
of the expiration of the 10-year collection period), the
IRS is obligated to notify no later than the date by which 1. New Warnings Required in
a “Certificate of Release” must be issued for the related Post-Lien Notices
NFTL. The IRS needs to notify no more than 30 days The FAST Act added new language to Code Sec. 6320,
after an Installment Agreement or Offer-in-Compromise such that the IRS must include in its post-lien notices
is accepted by the IRS, if the taxpayer resolves matters information to taxpayers about the possibility of passport
through one of these payment alternatives. Finally, when denial or revocation. The old law generally required the
a taxpayer applies for innocent spouse relief or equitable IRS to send the taxpayer a post-lien notice within five days
relief under Code Sec. 6015, the IRS needs to notify no of its filing explaining in “simple and non-technical terms”
more than 30 days after the application.17 the amount of the liability, the right to request a CDP
hearing and have a conference with the Appeals Office, and
4. Notifying the Taxpayer the procedures for seeking release of the federal tax lien.25
Aside from notifying the Secretary of the Treasury of im- Now, the post-lien notice must also include data about
portant events, the IRS is required to inform the taxpayer, “the provisions of Section 7345 relating to the certification
too. In particular, he or she must “contemporaneously” of [SDTDs] and the denial, revocation, or limitation of
notify the taxpayer of any SDTD certification, decertifica- passports of individuals with such debts … ”26
tion, and the right (described in “simple and nontechnical
terms”) to bring a civil suit against the U.S. government, 2. New Warnings Required in
as explained below.18 Pre-Levy Notices
The FAST Act made similar changes to the language in
5. Taxpayer’s Ability to Seek Redress Code Sec. 6331, thereby obligating the IRS to insert in
Things will go wrong, of course, and when this happens, its pre-levy notices information about potential passport
taxpayers have limited judicial relief. After the IRS has issues. Previously, the law demanded that the IRS send
notified a taxpayer of the SDTD certification, the taxpayer the taxpayer a pre-levy notice at least 30 days before the
can initiate a civil action against the U.S. government, proposed seizure explaining in “simple and non-technical
either in U.S. District Court or Tax Court, to determine terms” the tax provisions related to levy and sale of
whether the certification was erroneous from the outset, property, the right to request a CDP hearing and have
or whether the IRS has failed to properly decertify the a conference with the Appeals Office, the relevant pro-
taxpayer.19 From the beginning, the IRS website has cedures, payment alternatives available to taxpayers that
explained to taxpayers that their ability to seek judicial might prevent levy (such as Installment Agreements and
review is immediate: “You are not required to file an ad- Offers-in-Compromise), and standards and procedures
ministrative claim or otherwise contact the IRS to resolve concerning the release of NFTLs.27 The law now requires
the erroneous certification issue before filing suit in the the IRS to give additional data to taxpayers in the pre-levy
U.S. Tax Court or a U.S. District Court.”20 In terms of notice, i.e., information about “the provisions of Section
remedies, if the relevant court sides with the taxpayer and 7345 relating to the certification of [SDTDs] and the
rules that the certification was erroneous, it can order the denial, revocation, or limitation of passports of individuals
IRS to inform the State Department of this reality.21 The with such debts … ”28
legislative history makes it clear that this is the sole power
of the court, and “[n]o other relief is authorized.”22 The 3. Liberalizing Ability to Share
IRS website indicates the same, stating that Code Sec. Tax-Related Data
7345 “does not provide the court authority to release a The FAST Act expanded Code Sec. 6103(k) in or-
lien or levy or award money damages in a suit to determine der to allow the IRS to disclose certain tax-related
whether a certification is erroneous.”23 data to the State Department for “tax administration
FEBRUARY–MARCH 2018 41
The term “assessable penalties” refers to those items corporations. It is unclear whether unpaid “assessable
found in Code Sec. 6671 through Code Sec. 6725. For penalties,” alone, could trigger an SDTD certification
its part, Code Sec. 6671(a) expressly states that “assessable and thus deprive an individual of a passport under
penalties” shall be paid by the taxpayer upon notice and Code Sec. 7345.
demand by the IRS and “shall be assessed and collected
in the same manner as taxes.” It goes on to clarify that C. Is the $50,000 an Aggregate
any reference in the Code to the term “tax” shall include
or Annual Figure?
“assessable penalties.”39
While Code Sec. 7345(b)(1) states that the SDTD
threshold is $50,000, it does not specify whether (i)
Notwithstanding the pervasiveness this is an aggregate figure, such that the IRS can total
all outstanding taxes, penalties, and interest for all years
and importance of this issue, the and issue a certification if the amount exceeds $50,000,
IRS has issued relatively little public or (ii) this is an annual figure, meaning that the IRS
must determine this on a year-by-year basis and send
guidance since Code Sec. 7345 was
a certification only if the liability for a particular year
passed in December 2015. exceeds $50,000.46
FEBRUARY–MARCH 2018 43
I. Are the Notification review and approval from superiors, etc. In light of this
Procedures Adequate? reality, practitioners suggest that the IRS develop a special
system of expediting Installment Agreement and Offer-
Concern exists that some taxpayers subject to Code Sec. in-Compromise applications involving taxpayers who
7345, particularly those traveling or living abroad, will have been deprived of a passport under Code Sec. 7345
not receive sufficient/timely notice of critical matters, and postpone passport deprivation in situations where
such as a post-lien notice, pre-levy notice, and/or SDTD taxpayers have filed proper applications for an Installment
certification notice. Generally, the IRS is required to send Agreement or Offer-in-Compromise and are awaiting a
notices to taxpayers at their “last known address.” The IRS decision from the IRS.59
uses the address listed on the most recent tax return by
default, and taxpayers are able to update the IRS at any K. What About Litigation Expenses
time by filing a Form 8822 (Change of Address).
and Delays?
The challenges for taxpayers are many, including (i)
taxpayers on extended business or personal travel might If taxpayers believe that the IRS is wrong about an SDTD
not have tangible mail (including important IRS notices) certification or decertification, they have one remedy,
forwarded to their foreign location, particularly in this that is, they can start litigation against the IRS in either
era of email and other electronic communications, (ii) U.S. District Court or the Tax Court.60 The major prob-
taxpayers moving abroad for the first time may be wholly lem here is that the proverbial wheels of justice tend to
unaware of the advisability of filing a Form 8822 with turn slowly, even in the most efficient judicial bodies.
the IRS upon departure, (iii) even if the taxpayers make Certain practitioners have underscored that, while giv-
arrangements to forward mail and/or supply the IRS with ing taxpayers a way to seek relief is laudable, litigation
a timely Form 8822, it is notoriously hard for taxpayers likely will trigger considerable expenses for the taxpayer
to receive international mail in certain countries, (iv) the and a “significant delay during which a taxpayer might
IRS does not send notices to taxpayers via email, and (v) be improperly denied the freedom to travel internation-
taxpayers only have 30 days from the date of a post-lien ally for business or personal reasons.”61 Accordingly,
notice or pre-levy notice to seek a CDP hearing. Vari- practitioners have proposed the introduction of some
ous tax practitioners and organizations have warned the sort of expedited administrative appeal before obligat-
IRS about the importance of introducing an effective ing a taxpayer to litigate.62 Practitioners emphasized the
communication system for overseas taxpayers, because importance of such an administrative appeal right given
relying on the existing procedures could lead to taxpay- pervasive identify theft and the corresponding filing of
ers learning of a problem for the first time when a U.S. false returns, which could trigger unwarranted liabilities
immigration official seizes their passport upon reentering for taxpayers.63
the United States.58
L. Does Filing a Penalty-Abatement
J. Are Taxpayers Powerless to Request Affect Matters?
Confront Inevitable IRS Delays?
Although not specified in Code Sec. 7345, the legislative
As explained above, Code Sec. 7345(b)(2) provides several history indicates that an SDTD is comprised of taxes,
exceptions to the general definition of SDTD. Among penalties, and interest, and the IRS has adopted this
those exceptions are debts that the taxpayer is paying in interpretation. Code Sec. 7345(b)(2) identifies various
a timely manner pursuant to an Installment Agreement exceptions, explaining that the following situations do not
under Code Sec. 6159 and debts that the taxpayer has paid involve SDTDs: an individual has filed a proper request
or is paying in a timely manner pursuant to an Offer-in- for a CDP hearing and such hearing is still pending; an
Compromise under Code Sec. 7122. Practitioners have individual has elected innocent spouse relief under Code
identified the elephant in the room, which is that it can Sec. 6015(b) or Code Sec. 6015(c); and an individual has
take the IRS, particularly a busy Revenue Officer with a requested innocent spouse relief under Code Sec. 6015(f ).
crushing caseload, many months to review all the finan- Expanding on this theme, practitioners have urged the
cial data that taxpayers must provide in applying for an IRS not to utilize its power to deny or revoke a passport
Installment Agreement or Offer-in-Compromise, contact where a component of the relevant SDTD is a penalty, the
taxpayers and seek additional data or clarifications, confirm taxpayer has filed a proper penalty-abatement request, and
certain financial aspects with third parties, obtain internal the IRS has not yet responded to such request.64
FEBRUARY–MARCH 2018 45
author published his previous article on the topic, in March their issues by paying in full, entering into an Installment
2017. Although the IRS has not yet issued proposed or Agreement, or applying for an Offer-in-Compromise.
temporary regulations pertaining to Code Sec. 7345, it has Second, the IRS confirms that the State Department
published certain guidance in recent months. The guid- generally will grant taxpayers a 90-day grace period to
ance clarifies some issues, while leaving others unresolved. handle payment matters, but the window may be shorter
Below is a discussion of where we stand as of January 2018, if there is an urgent need to travel internationally. Notice
cognizant that things will continue to evolve in the future. 2018-1 states the following in this regard:
A. IRS News Release IR-2018-7 When a certified taxpayer applies for a passport, the
State Department, in general, will provide the applicant
The IRS issued a news release on January 16, 2018, putting with 90 days to resolve their tax delinquency … before
taxpayers on notice that it will start implementing Code denying the application [for the passport]. If a taxpayer
Sec. 7345 now and “strongly encouraging” taxpayers with needs their passport to travel within those 90 days, the
SDTDs to pay their liabilities to avoid losing their pass- taxpayer must contact the IRS and resolve the matter
ports. The news release also explains, without going into within 45 days from the date of application so that the
technicalities, that “a passport won’t be at risk” under the IRS has adequate time to notify the State Department.
new program for taxpayers who are in bankruptcy, victims
of a tax-related identify theft, in CNC status with the IRS Finally, the IRS addresses taxpayer rights if there is a
due to financial hardship, located in a federal disaster area, dispute about the filing of an SDTD certification or the
serving in a combat zone, have a pending application for failure to decertify. Notice 2018-1 first confirms that
an Installment Agreement or Offer-in-Compromise, and/ taxpayers are out of luck in terms of quick, inexpensive,
or have a tax adjustment already accepted by the IRS that administrative procedures: “The taxpayer may not go to
will satisfy the tax liability in full. IRS Appeals to challenge the certification or the decision
Even if taxpayers do not fall into one of the preceding by the [IRS] Commissioner or specified delegate not to
categories, the news release explains that taxpayers can still reverse a certification.” Then, Notice 2018-1 describes the
avoid having the IRS send an SDTD certification to the limited courses of available action, including calling the
State Department if they (i) pay the liability in full, (ii) number on Notice CP508C or filing a lawsuit with the
satisfy the liability via an Installment Agreement or Offer- Tax Court or other appropriate federal court.
in-Compromise approved/accepted by the IRS, (iii) satisfy
the liability by paying pursuant to a settlement agreement C. Internal Revenue Manual
with the U.S. Department of Justice, (iv) have a pending
CDP hearing request regarding a levy, or (v) have made The IRS, in preparing to start the SDTD certification
an innocent spouse election or requested innocent spouse process, updated and expanded the Internal Revenue
relief. This news release might serve to put taxpayers on no- Manual in December 2017. Much of the information
tice about imminent passport problems, but given its lack merely consists of summaries of Code Sec. 7345 and its
of details and use of conversational language, it does not legislative history, but, thankfully, there is some new data
clarify any substantive issues concerning Code Sec. 7345. here. Below is a discussion of some of the fresh, important
material from the IRS.
B. Notice 2018-1
1. Guidance About the Concept of SDTDs
At essentially the same time that it issued the news release, The SDTD threshold of $50,000 is the aggregate
the IRS also revealed its first piece of published guidance unpaid balance of assessment. It includes assessed
about Code Sec. 7345. Unfortunately, it did not come in taxes, penalties, and interest, but it does not include
the form of a lengthy Revenue Procedure or minutiae-filled accrued-but-unassessed penalties and interest.74
regulations. The IRS decided to issue Notice 2018-1, which As of January 1, 2018, the SDTD threshold, as in-
added little on the information front. Notice 2018-1 is com- dexed for inflation, has increased from $50,000 to
prised of two segments, the first of which simply provides $51,000.75
a basic summary of Code Sec. 7345. The other segment, Once the SDTD has been certified, paying the account
labeled “Discussion,” provides a few bits of relevant infor- below the threshold of $50,000 (or the appropriate
mation. First, in what comes as no surprise, the IRS tells threshold at the time of certification) will not result
delinquent taxpayers that they “should consider” resolving in a decertification.76
FEBRUARY–MARCH 2018 47
and cons of whether to file for 5. File a Request for Innocent Spouse
Collection bankruptcy, the client needs to Relief: In the case of clients who
Continued from page 12
know that the automatic stay will filed a married filing joint return,
operate to preclude the IRS from explore with both the husband
4. File for Bankruptcy Protection: certifying a tax debt as seriously and wife whether it is appropri-
As most tax practitioners are delinquent to the State Depart- ate and warranted to file a Form
relatively unfamiliar with the ment for purposes of revoking 8857, Request for Innocent Spouse
intricacies and complexities of the or denying a passport. If having Relief to obtain relief from joint
Bankruptcy Code, best practices a valid passport is an important and several liability from the
dictate that we advise our clients consideration for your client, this filing of a joint return for one
to consult bankruptcy counsel. could tip the balance in favor of of the spouses. Besides eliminat-
However, in weighing the pros filing for bankruptcy protection. ing or significantly reducing the
FEBRUARY–MARCH 2018 49