PASSPORTS AND THE IRS
They Have More in Common Than You Might Think
I’ve written in past issues of this newsletter about various rumors afoot that connected passports and the IRS. The rumors suggested that if you owe the IRS money, your passport could be revoked. At the time, I assured readers that such was not the case. However, that’s just not true anymore.
Now it’s official. On December 4, 2015, President Obama signed into law two new sections (some 1,500 words, combined) of the Internal Revenue Code. The provisions were part of H.R. 22, entitled, Fixing America’s Surface Transportation (FAST) Act. Oddly, this is a highway transportation bill. And more oddly, one new section concerns passports.
You might ask, “What the heck do domestic highways have to do with passports?” And even beyond that, you might wonder, “What do passports have to do with taxation and the IRS?” In my opinion, the answer to both question is, “absolutely nothing.” However, Congress has most definitely connected the two.
You see, this amendment provides for the revocation of passports for certain tax debtors. That’s right—if you owe the IRS more than $50,000, then your passport can be revoked. The law refers to this as a “seriously delinquent tax debt.”
The primary function of the bill was to reauthorize the federal highway, public transportation, and highway safety programs, and to provide spending increases to cover projected inflation. But as to income taxes, it adds a brand-new section to tax code. It is code section 7345. The new law authorizes the Secretary of Treasury, on the recommendation of the Commissioner of the IRS, to “deny, revoke, or limit the passport of a taxpayer” with a tax debt in excess of $50,000. The statute explicitly provides for inflation adjustments to that threshold amount.
The language of this law creates four immediate questions.
First, the law does not specify whether the $50,000 threshold includes penalties and interest. However, because this detail is not clarified, 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.
Secondly, and more importantly, the law does not specify whether the debt is measured by individual years, or if it is a 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 most aggressive view of enforcement, 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 generic domestic tax issues?” Where is the evidence that Jane and Joe American, delinquent on their taxes for whatever reason, are going to somehow flee the country to avoid the IRS? This assumes (for the sake of discussion) that restricting the foreign travel of U.S. citizens with no criminal background is somehow acceptable.
If the law were pointed at citizens who incurred a federal tax debt expressly because of their failure to report foreign income and assets, that might make some sense. For example, 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 a bank or securities account. In such a case, a person has more 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.
And my fourth question is, what about appeals considerations in connection with any potential restriction or revocation? Is the IRS going to be allowed to act unilaterally, without any right of appeal? How will the agency ensure a citizen’s right to due process in connection with its actions? At this point, we just don’t know. Certainly, taxpayers must be notified of such a decision and should be allowed some kind of appeal to challenge it.
The statute does have some limits, however. The language clearly 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:
- An installment agreement or Offer in Compromise in effect,
- A CDP appeal is pending, or
- A request for innocent spouse relief is pending.
In addition to the questions raised earlier, you might also wonder whether revoking a passport for a tax debt is a valid exercise of the federal government’s 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 in arrears more than $20,000 on 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 to have 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, a federal bankruptcy court, in the case of 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.
Given this, 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 new statute.
The Joint Committee on Taxation reports that this law should net the government $395 million in additional revenue through 2025. However, I fail to understand how it will be the least bit effective in collecting delinquent taxes. As I stated in the opening portion of chapter 6 of my new How to Get Tax Amnesty (excerpted above), 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 the tax liens generally do not increase the collection of delinquent taxes, and they 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 new law further enforces an opinion I’ve held for years, and that is we must utilize the tool of Collection Due Process hearings under sections 6320 and 6330 whenever possible. As we see from the exceptions above, a pending CDP hearing explicitly removes a taxpayer from any 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 agreement requests often merely “play goalie” in the process. That is, they look for ways to say “no,” rather than trying to find a reasonable resolution. Will they be even harder to work with now, knowing that if there is no installment agreement the taxpayer might lose his passport? I can guess, but only time will tell.
And what of the reportedly 8 million Americans living abroad? Will they be able to return home, or will they be stranded abroad until they work out an installment agreement with the IRS? To that question, I note that the new law specifies that the Secretary of Treasury can recommend that a passport be denied, revoked, or limited (emphasis mine), meaning that the Secretary of State could tag a passport for flight into the USA but not for a subsequent flight out of the U.S.
The new law includes several other changes to the tax code, mentioned briefly here.
- The law clarifies the applicability of the six-year statute of limitations period in code section 6501(e)(1). This applies in cases where more than 25 percent of gross income is omitted from a tax return.
- The law requires more mortgage information reporting to the IRS, under section 6050H. This is yet another in the endless list of information-gathering tools that Congress is willing to give the IRS.
- The law changes the tax return filing due dates for partnerships, S corporations and C corporations in code section 6072.
- The law requires the IRS to use private debt collectors to collect “inactive tax receivables.” These are defined as: a) debts removed from “the active inventory for lack of resources or inability to locate the taxpayer,” b) debts for which more than one-third of the collection statute of limitations has expired and the case has not been assigned for collection within the IRS, or c) debts as to which more than a year has passed without further interaction with the taxpayer regarding collection. And here we go again with private debt collectors. This was tried about ten years ago, without much success.
- The law creates a “Special Compliance Personnel Program Account” within the IRS to increase both field collections and automated tax collections.
As to this last element, the “Special Compliance Personnel Program Account,” it forms brand-new code section 6307. It replaces the “collection enforcement activities” previously funded by section 6306(c)(2). By the definition in the new statute, “special compliance personnel” will be individuals employed by the IRS “as field function collection officers or in a similar position, or employed to collect taxes using the automated collection system or an equivalent replacement system.”
More simply stated, Congress funded more revenue officers for the express purpose of increasing collection efforts.
Like I said, we should expect to see an increase in IRS collection efforts.
The passport restrictions created under new code section 7345 bring into sharp relief the need to resolve any outstanding tax debt problems. In this regard, my book How to Get Tax Amnesty has never been more important.