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They Have More in Common Than You Might Think

Fixing America’s Surface Transportation Act of 2015, signed by President Obama, requires the State Department to deny or revoke passports of certain delinquent taxpayers. See code §7345. Under the law, if a person owes the IRS more than $50,000, then his passport can be denied, evoked or limited.

Up to this point, the IRS has not enforced this law. However, effective February 2018, they will begin to do so. The IRS expects to certify to the State Department that at least 2,700 taxpayers are “seriously delinquent,” thus subjecting them to mandatory passport revocation or restriction. But this is just a drop in the bucket in terms of people who will be affected. In light of that, let’s examine three immediate questions raised by the language of the statute.

First, the law does not specify whether the $50,000 threshold includes penalties and interest. However, due to lack of clarification, I fully expect the IRS to say that the amount does include penalties and interest. In that way, the IRS can threaten more passports, and thus effectively squeeze more taxpayers.

Second, and more importantly, the law does not specify whether the debt is measured by individual years, or if it’s cumulative debt over all delinquent years. That distinction is important because, while delinquent taxpayers may have cumulative debts in excess of $50,000, each individual tax assessment is usually well under $50,000. Again, I expect the IRS to take the more aggressive view, meaning that the $50,000 will be looked at as an aggregate amount.

The third question is even more vexing in my mind. That is, why is Congress restricting the foreign travel of people with domestic tax issues? What evidence is there that Jane and Joe American, delinquent on their taxes for whatever reason, are going to somehow flee the country to avoid the IRS?

If the law were pointed at citizens with debt expressly because of their failure to report foreign income and assets, that might make some sense. Suppose a person incurred $100,000 in delinquent tax assessments and FBAR penalties. The FBAR penalty applies when one fails to report a financial interest in, or a signatory authority over, a foreign financial asset, including bank and securities accounts. In such a case, a person has some capacity to flee since he already has a financial presence—and resources—offshore. As such, there is a more defined and direct connection between the tax debt and one’s passport. But the new law makes no such distinction.

The statute does have limits, however. The language specifies that the debt must be a tax debt for which either a notice of lien has been filed or a notice of levy has been issued. And, the statute adds three further exceptions. The law does not apply to a debt for which there is:

1. An installment agreement or Offer in Compromise in effect,

2. A CDP appeal is pending, or

3. A request for innocent spouse relief is pending.

For about the last year, the IRS has been providing information in Final Notice and Lien Filing Letters, the CDP Notices, that passport revocation is possible. The problem with this is that about 75% of the taxpayers who meet the definition of being “seriously delinquent” will get no notice about revocation because they received a CDP Notice prior to the effective date of §7345. The IRS sends just one such notice. Moreover, those who are now getting notice will find the language buried in about five other pages of detailed explanation that come with the CDP Notice. Thus, I question whether this revocation scheme meets the Constitutional standard of due process of law. 

Also troubling is the fact that taxpayers with a declared hardship, or whose cases are currently being worked by the Office of the Taxpayer Advocate, are not excepted from revocation. So even though a person’s case is closed by the IRS as uncollectible, he can nevertheless have his passport revoked.

In addition, one has to wonder whether revoking a passport for a tax debt is a valid exercise of governmental power. Unfortunately, I believe the courts would say it is. As a starting place, the Supreme Court in Haig v. Agee, 453 U.S. 280 (1981) upheld the revocation of the passport of a disgruntled CIA agent who was blowing the covers of other CIA agents. The Court distinguished interstate travel from foreign travel, and held that the latter is subject to “reasonable governmental regulation.” Id. at 306.

The Ninth Circuit, in Eunique v. Powel, 281 F.3d 940 (9th Cir. 2002), applied that standard when it upheld 42 U.S.C. §652(k), the statute under which Eunique was denied a passport because she was more than $20,000 arrears on her child support payments. She argued that she had a fundamental constitutional right to international travel. The Court of Appeals, in contrast, said that restrictions on international travel are subject to a “rational basis analysis,” meaning that Congress needs only an important reason behind its law, and Congress has very important reasons for enforcing child support payments. Id. at 944.

Later that same year the bankruptcy court in In re Walker, 276 B.R. 568 (Banrk. W.D. Tex. 2002) refused to remove a “hold” placed on the debtor’s passport under the same federal statute. That court addressed squarely the question of whether Congress has the right to enforce state-imposed child support obligations by denying passports. For its answer, it cited the Tenth Circuit’s decision in Kansas v. United States, 214 F.3d 1196 (10th Cir. 2000), which upheld the statute as a valid exercise of the Spending Clause.

There is little doubt in my mind that a federal court would find a “rational basis” (even if I don’t) for Congress wanting to use passport restrictions as a means of squeezing delinquent taxpayers. As such, I’m sure the court would uphold this statute.

However, I fail to understand how this law will be effective in the least at collecting delinquent taxes. As I state in the opening portion of chapter 6 of my book How to Get Tax Amnesty, the IRS is rarely helped in tax collection by the filing of federal tax liens. The National Taxpayer Advocate has repeatedly published data proving that tax liens generally do not increase the collection of delinquent taxes and rarely have a positive impact on taxpayer compliance. If a tax lien can’t get the job done, how will passport revocation make any difference?

The language of the law further enforces an opinion I’ve held for years, and that tax pros must utilize the tool of Collection Due Process hearings under section 6320 and 6330 whenever possible. As we see from the explanation above, a pending CDP hearing explicitly removes a taxpayer from any immediate danger of having his passport revoked. However, CDP appeals don’t last forever. That means you must deal directly with the tax debt issue to get it resolved once and for all. Notably, an Offer in Compromise also removes the risk of passport revocation.

Likewise, having an approved installment agreement removes the passport danger. But as I’ve stated a hundred times, revenue officers and appeals officers who screen installment agreements often “play goalie” in the process. Will they be even harder to work with now, knowing that if there is no installment agreement the taxpayer might lose his passport? Only time will tell.

The bottom line is that taxpayer must know the risk and tax pros must understand the options available to mitigating the risk. 

Article taken from February 2018  issue of "Pilla Talks Taxes."


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