Will the IRS come for your passport?

Sarah called me in a panic when she received IRS Notice CP508C, informing her that her US passport was being revoked. Poor Sarah was planning on traveling overseas in a week with her boyfriend and she was at a loss for what to do.

I told Sarah that the CP508C is a notice from the IRS informing her that the IRS has certified to the US State Department that she owed a seriously delinquent tax debt (SDTD) in excess of $52,000.

She nervously asked: What can the State Department do? I explained that if she applied for a passport or a passport renewal, the State Department could deny her application and would not issue a passport to her or renew her current passport. Additionally, the State Department could revoke her current passport and preclude her from traveling internationally. In other words, Sarah’s romantic overseas adventure was out of the question – until it wasn’t.

I explained Sarah’s limited options. She could either request an installment agreement or pay off her balance — all $62,000 of it. Sarah was fortunate enough to be able to pay the full liability. I notified the IRS Taxpayer Advocate and informed them of her situation. The Taxpayer Advocate expedited the passport certification process which allowed Sarah to travel and avoid having to come up with an excuse to tell her boyfriend as to why she couldn’t go on vacation with him as planned.

The earliest reference to a document granting safe passage to travel across borders is found in the Book of Nehemiah in the Old Testament where the Persian King Artaxerxes provided Nehemiah with a letter requesting that foreign governors offer him safe passage through their territories. In more recent times, Section 707 of Public Law 95-426 signed into law on October 7, 1978, amended Section 215 of the Immigration and Nationality Act, making it “unlawful for any citizen of the United States to depart from or enter, or attempt to depart from or enter, the United States unless he bears a valid passport.”

Further, the Fixing America’s Surface Transportation Act (FAST Act) enacted on December 4, 2015, included Internal Revenue Code (IRC) §7345, Revocation or Denial of Passport in Case of Certain Tax Delinquencies, which allows the IRS to notify the Secretary of State to deny, revoke or limit a US passport upon certification of a SDTD. This is defined as “an unpaid, legally enforceable federal tax liability of an individual” (tax including assessed penalties and interest) which has been assessed, is more than $50,000 indexed for inflation (current threshold is $52,000), and for which a lien has been filed under IRC §6323 and the administrative Collective Due Process (CDP) rights under IRC §6320 have been exhausted or lapsed, or a levy has been made under IRC §6331.

It’s that simple! If an individual currently owes more than $52,000; a federal tax lien was filed against the taxpayer for all the tax periods covering the federal tax liability; CDP rights have been exhausted and a levy has been issued, the individual could be subject to passport revocation. Submitting a payment to bring the liability under the $52,000 threshold after an individual has been certified will not reverse the notification of certification.

Does that mean traveling taxpayers should panic? Possibly. The State Department is responsible for the issuance of US passports and has the sole authority to revoke or limit a passport held by a certified individual. Whether a passport will be revoked or limited is left solely to the discretion of the State Department (and not the IRS).

That said, the IRS will use an automated approach to aggregate unpaid liabilities, and if the total exceeds the threshold, the taxpayer will be certified as having a SDTD. The Internal Revenue Manual states that the IRS will forward a list of taxpayers with SDTDs on a weekly basis to the State Department and the taxpayers will be precluded from receiving a new or renewed passport.

If the taxpayer is located outside of the US upon revocation of the passport, §32101(e)(2)(B) of the FAST Act allows the Secretary of State to either limit a previously issued passport or issue a limited passport only for return travel to the US.

The IRS indicated that the State Department will hold the passport application for 90 days to allow the taxpayer to fully pay the SDTD, arrange for an installment or settlement with the IRS, or resolve any erroneous certification issues.

The IRS allows a taxpayer to request expedited decertification if they are eligible and (1) have foreign travel scheduled within 45 days or less, or live abroad, and (2) have a pending application for a passport or renewal and can provide their passport application number and the location of the passport application. The IRS may then complete and send Form 14794, Expedited Passport Decertification, directly to the State Department.

There is no administrative appeals process for certification of a taxpayer’s account. Taxpayers whose accounts are certified to the State Department as having a SDTD can file suit in the Tax Court or a District Court of the United States. If the court determines that the certification is erroneous or should have been reversed, it can order the certification reversed.

There are several systemic issues associated with the passport revocation program. We have encountered two of these. In one case, the tax liability was paid in full and the taxpayer received a CP508C one month after the payment was made. In the second case, the taxpayer had an existing installment agreement and still received a CP508C. In both cases, the Taxpayer Advocate office was contacted, and they assisted in resolving the revocation issues.

We recommend that the Taxpayer Advocate be contacted for passport revocation issues that include hardship, are systemic and erroneous, need special and prompt attention, and for expedited issues.

We also suggest that practitioners engage with their clients to be proactive in attempting to resolve unpaid tax liability problems. Ask your clients how they would like to resolve outstanding tax issues – think installment agreements, an offer in compromise, paying the full liability, or establishing uncollectible status due to financial hardship. Remember that a pending installment agreement request will stop the CP508C letter from being issued.

We can attest that the process of decertification does work. In a recent case, both a husband and wife received a CP508C. Their outstanding tax liability was placed in uncollectible status due to financial hardship through a Revenue Office and a CP508R was issued two months later.

Always work with your CPA and attempt to resolve cases as expeditiously as practicable.

Harold D. Katz, CPA, TEP of Katz LLC in Chicago, Illinois; Larry J. Wolfe, CPA of Larry J. Wolfe Ltd. in Skokie, Illinois.