On January 16, 2018, the IRS issued guidance on the implementation of the new IRC Section 7345, which requires the IRS to notify the Department of State (“State Department”) when an individual has a “seriously delinquent tax liability”. Typically, the State Department will deny an application for a new passport, or an application for renewal, upon receiving such notice. Implementation of this Section will begin in January 2018.
Where does this apply?
Section 7345 was enacted by the Fixing America’s Surface Transportation (“FAST”) Act in December of 2015. This section applies to “seriously delinquent tax debts”, defined as an “unpaid, legally enforceable Federal tax liability of an individual” that meets the following requirements:
- The liability has been assessed,
- The liability is greater than $50,000, and
- A notice of lien has been filed and the taxpayer’s right to a hearing has been exhausted or have lapsed, or
- A levy has been issued.
To determine whether the $50,000 tax liability requirement has been satisfied, the total amount of all current tax obligations, including penalties and interest, are aggregated.
Any tax debt that is being paid under an approved installment agreement, an approved offer in compromise, or a settlement agreement with the Justice Department is excepted from qualifying as a “seriously delinquent tax debt”. Also not included as a “seriously delinquent tax debt” are debts for which collection is suspended due to a Collection Due Process hearing request, or the individual made an innocent spouse election or requested innocent spouse relief. However, the IRS will not notify the State Department if one of the exemptions applies
What are the consequences?
If the IRS certifies that a taxpayer has a “seriously delinquent tax debt” they are required to notify the State Department. They must also contemporaneously notify the taxpayer when he or she is the subject of a certification or reversal of a certification. The notice must include a description in simple, nontechnical terms of the right to bring a civil suit. This notice is the Notice CP508C, “Notice of certification of your seriously delinquent federal tax debt to the State Department.”
Generally, the State Department will provide a certified applicant with 90 days to resolve the tax delinquency. If the delinquency is not resolved in this timeframe, the application is typically denied. If an individual needs to travel within 90 days, they must resolve the tax delinquency within 45 days of the passport application date.
The IRS is also required to notify the State Department once a certification has been reversed. The certification may be reversed due to:
- an IRS determination that the certification was erroneous,
- the debt is fully satisfied,
- the debt becomes unenforceable, or
- the debt ceases to be a “seriously delinquent tax debt”.
Once the State Department receives notice of the reversal, they will remove the certification from the individual’s record at the State Department. Section 7345 also requires the IRS to notify a taxpayer when he or she is the subject of a certification or reversal of a certification. This notice must include a description of the taxpayer’s right to bring a civil suit if they believe the certification (or failure to reverse) is wrongful.
What should I do if I receive a Notice?
Taxpayers that receive notice that their “seriously delinquent tax debt” has been certified and communicated with the State Department should consider paying the tax owed in full. If this is not possible, the taxpayer should enter into an installment agreement with the IRS or make an offer in compromise. If the taxpayer believes the certification to be in error, the sole remedy is to challenge the certification with civil action. There is no process with IRS Appeals whereby the taxpayer may challenge a certification, or a failure to reverse a certification. A taxpayer who believes the Notice CP508C is wrong may want to call the number on the Notice to discuss the issue with the IRS.
Contact us with any questions you may have on this issue or if you receive a Notice.
Carrie Koshkin, JD
With nearly 15 years of experience in international tax law, Carrie’s international tax services background includes implementing tax-efficient organizations and helping clients enter new jurisdictions. Additionally, she focuses on inbound/outbound tax issues, U.S. tax implications of international restructuring, and more. Contact her at email@example.com or +1.713.860.0219.