Imagine this scenario — Jane just received a CP508C notice informing her that her passport is being revoked. Unfortunately, it’s bad timing for Jane as she is about to travel overseas for business. She doesn’t know what to do and reaches out to her CPA for help.
Jane’s CPA explains that the IRS notified the U.S. State Department of her seriously delinquent federal tax debt (SDTD) and as a result is revoking her current passport. Jane has limited options. She needs to request an installment agreement or pay off the tax debt (both are a struggle for her as she needs to travel overseas to earn income to pay her debts).
She ends up finding a way to pay the IRS in full at which point her CPA notifies the local Taxpayer Advocate Service (TAS) office to help expedite the passport decertification process. She receives CP508R notifying her that the certification of tax debt was reversed. Only with the diligent help of her CPA and the TAS is Jane able to get her passport reinstated, just in time for her travel plans.
Could this scenario be a common occurrence for your clients soon?
On Dec. 4., 2015, the Fixing America’s Surface Transportation Act (FAST Act) was enacted and included Sec. 7345, Revocation or denial of passport in case of certain tax delinquencies, allowing the IRS to notify the Secretary of State to deny, revoke or limit a U.S. passport upon certification of an SDTD.
An SDTD is defined as “an unpaid, legally enforceable federal tax liability of an individual” which has been assessed, is more than $50,000 indexed for inflation (current threshold is $51,000), and for which a lien has been filed under Sec. 6323, Validity and priority against certain persons. Also, the administrative Collection Due Process (CDP) rights under Sec. 6320, Notice and opportunity for hearing upon filing of notice of lien, have been exhausted or lapsed or a levy has been made under Sec. 6331, Levy and distraint. Note that the tax liability includes the actual tax plus assessed penalties and interest.
Simply put, if an individual taxpayer currently owes more than $51,000, 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, then the individual could be subject to passport revocation. Submitting a payment to bring the liability under the $51,000 threshold after an individual has been certified will not reverse the notification of certification.
There are many facets to the passport revocation process. Here are some considerations and details to keep in mind:
- IRM 22.214.171.124.19.2 (12-26-2017) states that an SDTD includes tax assessments made under an individual’s Social Security number (SSN) or federal employer identification number (FEIN) including U.S. individual income taxes, trust fund recovery penalties, business taxes for which the individual taxpayer is liable and other civil penalties. Assessments, including FBAR penalties assessed under Title 31 of the Bank Secrecy Act and other non-tax liabilities outside the scope of the IRS, do not constitute an SDTD. The $50,000 threshold does not include accrued interest and penalty (IRM 126.96.36.199 (12-20-2017)).
- The statutory exceptions to passport revocation or denial include a tax debt being paid in a timely manner under Sec. 6159, Agreements for payment of tax liability in installments, or Sec. 7122, Compromises, a debt where collection is suspended due to a requested or pending CDP hearing or a request for relief under the innocent spouse rules of Sec. 6015, Relief from joint and several liability on joint returns. Other statutory exclusions are detailed in IRM 188.8.131.52.3 (12-20-2017).
- The IRS also has the discretion to exclude categories of tax debt from certification (IRM 184.108.40.206.4 (12-20-17) and 220.127.116.11.19.4 (12-26-17)), even if the debt meets the criteria of an SDTD. Some of these include debt deemed uncollectible due to hardship, debt resulting from identity theft or taxpayers in a disaster zone.
- The IRS is required to notify the taxpayer, in writing, at the time the certification of an SDTD is made to the State Department (IRM 18.104.22.168.7 (12-20-17)).
- Often, taxpayers’ representatives with a valid power of attorney are not receiving the CP508C or CP508R notices. Taxpayers’ representatives must remember to ask clients with liabilities over $51,000 to forward all notices to them including the CP508C and CP508R.
- The IRS can reverse the certification of an SDTD as outlined in IRM 22.214.171.124.8 (12-20-17).
- There is no administrative appeal process for certification of a taxpayer’s account. Taxpayers whose accounts are certified to the State Department as an SDTD can file suit in U.S. Tax Court or a District Court of the U.S. If the court determines the certification is erroneous or should have been reversed, it can order the certification reversal (IRM 126.96.36.199.9 (12-20-2017)).
The 2017 National Taxpayer Advocate Annual Report to Congress included a section on passport denial and revocation that provided criticisms of the process and detailed the taxpayer rights that have been severely and negatively impacted.
The report stated that the TAS provided the IRS with constructive comments on Notice CP508C. First, the notice only provides two options for the taxpayer to preclude the State Department from denying, revoking or limiting the passport: payment of the debt in full or the alternate payment arrangements described above. Second, the notice does not refer to scenarios where the taxpayer may be a victim of identity theft or qualifies for uncollectible status.
Nina E. Olson, the National Taxpayer Advocate (NTA), has written several articles for the TAS NTA blog about the IRS’s passport program which includes a focus on the IRS’s refusal to exclude open TAS cases from passport certification.
There are systemic issues associated with the passport revocation program. Examples include an instance when the tax liability was paid in full and the taxpayer received a CP508C notice one month after the liability was paid in full. In another case, the taxpayer had an existing installment agreement, yet the taxpayer received a CP508C notice. In both cases, the TAS was contacted and assisted in resolving the case.
What CPAs can do
Practitioners and their clients should be proactive in attempting to resolve unpaid tax liability issues. Ask your clients with outstanding tax issues how they would like to resolve the issue. A few of the alternatives include an installment agreement, offer in compromise, full payment of the liability or request for uncollectible status due to financial hardship.
Remember, a pending installment agreement request will stop the CP508C letter from being issued. Use this request for an installment agreement template as a guide.
Do not let your clients lose their CDP rights. File a Form 12153, Request for a Collection Due Process or Equivalent Hearing, in response to Notice 3172 and/or Notice 1058 and try to resolve the issue through CDP. Remember CP508C letters can be issued if the accumulated liability exceeds $51,000 and all administrative remedies such as CDP have been exhausted. Look at the IRS Collection Appeal Options Quick Reference Chart to help you navigate the hurdles.
The process of decertification does work. In a recent case, a husband and wife each received notice of certification (CP508C) on Aug. 20, 2018. The husband and wife’s outstanding tax liability was placed in uncollectible status due to financial hardship through a Revenue Office and notice CP508R was issued on Oct. 22, 2018.
In another case where the taxpayer owed over $300,000, the taxpayer was able to enter into an installment agreement of $100 per month and within two months received notice CP508R.
Always work and attempt to resolve cases at the lowest possible level. Make sure that all unfiled tax returns have been filed and, if needed, an estimated tax payment submitted for the current year. Also, have the appropriate collection information statement (Forms 433-A or 433-F) complete and ready to go, should you need to justify your client’s financial situation. Consider contacting your local TAS office to assist with decertification.
Passport revocations are becoming more frequent as the IRS cracks down on SDTD. If your client finds out he or she is subject to a passport revocation for failure to pay the IRS, there are many avenues of assistance available to get them back on track.