In recent years, the U.S. government has taken steps to increase enforcement measures to allow the IRS to collect delinquent taxes. This includes adding Sec. 7345 to allow the IRS and U.S. State Department to revoke or deny passports of individuals with seriously delinquent tax debts.
In order to revoke or deny a passport, the IRS must first certify the debt, which involves identifying individuals with seriously delinquent tax debt and certifying a list of those individuals to the U.S. State Department. The taxpayer has the opportunity to challenge the certification, and if the certification is not successfully challenged, the U.S. State Department may proceed to revoke or deny the passport.
The IRS’s power to certify is limited, however. The burden is on the IRS to show that a notice of lien has been filed or a levy has been made to collect the debt. There are probably a lot of cases where the IRS cannot meet this burden. This is exemplified in the case of Belton v. Commissioner, T.C. Memo. 2023-13.
Facts & Procedural History
The facts of this case are not remarkable. The taxpayers owed the IRS back taxes for several years. They had submitted an offer in compromise and/or proposed an installment agreement–both of which the IRS apparently refused to grant.
In 2019 after the tax debt was several years old, the IRS eventually sent the taxpayers two letters which were the standard “Notice of Certification of Their Seriously Delinquent Federal Tax Debt to the State Department.” The taxpayers filed a petition in the U.S. Tax Court to review the Sec. 7345 certifications under Sec. 7345(e).
The court concluded that it could not consider a challenge to the underlying tax debt in these cases, but it also had to consider whether the record was sufficient to demonstrate that the IRS issued valid levies as required for this certification.
About Section 7345 & IRS Certification
Section 7345 relates to “Revocation or Denial of Passport in Case of Certain Tax Delinquencies.” It provides the authority for the U.S. Secretary of State to revoke or deny a passport to individuals with seriously delinquent tax debt, defined as an unpaid, legally enforceable federal tax liability of an individual that exceeds $50,000 (including interest and penalties).
Section 7345 was added as part of the “Fixing America’s Surface Transportation (FAST) Act” which was enacted in 2015 to increase enforcement measures for collecting delinquent taxes. The overall goal of the FAST Act was to reduce the federal budget deficit.
This law was phased in over several years, with full implementation taking effect in 2018.
Section 7345 says that the IRS is to certify the debt before the passport can be revoked or denied. This involves the following steps:
- IRS Identification: The IRS identifies individuals with “seriously delinquent tax debt,” as defined under the law.
- Certification to State Department: The IRS then certifies a list of these individuals to the U.S. Department of State, which is responsible for issuing passports.
- Notice to Taxpayer: The U.S. State Department then sends a notice to the taxpayer, informing them of their seriously delinquent tax debt and that their passport may be revoked or denied.
- Opportunity to Challenge: The taxpayer has an opportunity to challenge the certification by the IRS, such as by proving that they are in a payment agreement with the IRS or that they have a pending request for a Collection Due Process hearing.
- Revocation or Denial: If the certification is not successfully challenged, the U.S. State Department may proceed to revoke or deny the taxpayer’s passport.
It’s important to note that individuals with seriously delinquent tax debt may still be able to obtain a limited-validity passport for emergency travel or to return to the United States.
Limits on the IRS’s Power to Certify
Section 7345 says that a “seriously delinquent tax debt” is one that, inter alia, with respect to which:
(i) a notice of lien has been filed pursuant to section 6323 and the administrative rights under section 6320 with respect to such filing have been exhausted or have lapsed, or
(ii) a levy is made pursuant to section 6331.
In the present case, the court concludes that the IRS may not properly make a certification if it violates the terms of either Sec. 6323 (relating to liens) or 6331 (relating to levies), and that any such certification would be erroneous if either of these sections were not met. As such, the court notes that the burden is on the IRS to show that a notice of lien has been filed for a taxpayer’s seriously delinquent tax debt and the taxpayer’s administrative rights have lapsed or been exhausted or that a levy has been made to collect the debt.
The IRS Levy Limit: “Made Pursuant To”
If the IRS has not yet filed a Notice of Tax Lien under Sec. 6323, the IRS has to rely on the levy to show that the debt is a “seriously delinquent tax debt.” The “made pursuant to section 6331” adds additional requirements for levies:
Nested within clause (ii) are two specific requirements: first, that levy actually was made (that is, the issuance to the taxpayer of a notice of intent to levy would not suffice for this purpose), and, second, that the levy was made properly.
In the present case, the IRS presented IRS transcripts that showed that the IRS issued a levy on the taxpayer’s state income tax refund:
In the Commissioner’s view, the TXMODA transcripts, and in particular action codes 600 and 640, are sufficient to establish that the requirements of clause (ii) have been satisfied for 2010, 2014, and 2015.
The court agreed with the IRS in principle but noted that the IRS transcripts contained contradictory information. For example, the transcripts noted that there may have been a pending installment agreement or offer in compromise at the time of the levy. This would invalidate the levy, making the levy not “proper.”
Since the IRS has the burden in passport cases, the court concluded the absence of evidence showing that the IRS complied with the rules was fatal for the IRS. The court granted the taxpayer’s motion for summary judgment on this issue.
The Takeaway
Those who receive a certification of their passport or have their passports revoked or denied should take note of this case. It provides a remedy that may apply to quite a few taxpayers given that the IRS uses a bulk approach to collections. If the IRS did not file a lien or issue a levy properly, the IRS cannot certify the taxes as being seriously delinquent. The court will not uphold certifications in these instances.