In 2015, I wrote a blog post analyzing IRS collection performance, looking at the effects of different drivers of collection such as notices, installment agreements, liens, levies, and refund offsets. Today, I’d like to pick this topic back up, but focus on a collection issue associated with new legislation. In late 2015, Congress passed the Fixing America’s Surface Transportation Act (FAST Act), which aimed to boost tax collection through two avenues:
- Resuming the use of private collection agencies (PCAs) for certain delinquent accounts; and
- Requiring the Department of State (DOS) to deny a passport application and allowing it to revoke or limit a passport if the IRS certifies a taxpayer’s seriously delinquent tax debt.
I plan to blog about private debt collection in the future, but today, let’s discuss the new law that will deprive some taxpayers of their passports. Under the FAST Act, a seriously delinquent tax debt is an “unpaid, legally enforceable Federal tax liability of an individual”, which:
- Has been assessed,
- Is greater than $50,000 (adjusted for inflation), and
- Meets either of the following criteria: (1) a notice of lien has been filed under Internal Revenue Code (IRC) § 6323 and the Collection Due Process (CDP) hearing rights under IRC § 6320 have been exhausted or lapsed; or (2) a levy has been made under IRC § 6331.
However, there are statutory exceptions to the term “seriously delinquent tax debt.” These include:
- A debt that is being timely paid through an installment agreement (IA) or offer in compromise (OIC);
- A debt for which collection is suspended because the taxpayer requested a CDP hearing or a CDP hearing is pending;
- A debt for which collection is suspended because the taxpayer has requested relief from joint liability (known as innocent spouse relief).
In addition, the IRS has created discretionary exceptions, such as if the taxpayer is placed in currently not collectible (CNC) hardship status, has an IA or OIC pending, or is a victim of identity theft. The IRS plans to publish a notice discussing these exceptions and other information about the passport certification process shortly before implementation. Currently, there is no firm date for implementation, but I’ll update this blog with a link when the IRS publishes the notice.
The concept of restricting a person’s travel to incentivize behavior isn’t new. In 1996, Congress passed the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996, which requires the DOS to deny a passport application and allows the DOS to revoke or limit a passport if the person owes delinquent child support exceeding $5,000 (subsequently lowered to $2,500). Courts have long recognized that the right to travel internationally is a liberty right, protected by the Due Process Clause. See e.g., Kent v. Dulles, 357 U.S. 116 (1958). In the context of passport denial for unpaid child support, courts have found the statute meets due process requirements because it provides for notice and an opportunity to be heard prior to the state agency certifying the unpaid child support to the federal government. Weinstein v. Albright, 261 F.3d 127 (2nd Cir. 2001), aff’g 2000 WL 1154310 (S.D.NY 2001).
The Department of Health and Human Services, Office of Child Support Enforcement (OCSE) requires states to issue (or request OCSE to issue) a Pre-offset Notice (PON) for all new cases within the Federal Tax Refund Offset Program, the Administrative Offset Program, and the U.S. Passport Denial Program. Following the issuance of a PON, there is a 30 day holding period before the passport denial occurs. The primary focus of the PON is to communicate the pending consequences of not resolving the unpaid amount – that is, administrative offset, federal tax refund offset, and passport denial if the amount is greater than $2,500. You can view a sample PON in the OSCE Federal Offset Program Technical Guide. The OSCE Guide strongly encourages states to send repeated PONs to the noncustodial parents at least annually.
In the context of passport denial for a seriously delinquent tax debt, notice and an opportunity to be heard prior to the certification are limited. The FAST Act only requires two forms of notice to taxpayers who will be certified:
(1) a notice sent to the taxpayer close to or at the same time as the IRS certifies the seriously delinquent tax debt (“contemporaneous notice”), and
(2) language included in Collection Due Process (CDP) hearing notices explaining the potential certification.
Unlike the PONs in the child support context, currently, the IRS does not plan to provide any additional, direct notice to affected taxpayers beyond the statutory requirements. I believe this lack of notice may not satisfy taxpayers’ due process rights under the Fifth Amendment of the Constitution because taxpayers do not have a meaningful opportunity to be contest the certifications prior to them taking place. Furthermore, it infringes on the Taxpayer Bill of Rights, notably the right to be informed and the right to challenge the IRS’s position and be heard. The passport language in the broader CDP notice is delivered at a time when the taxpayer is focusing on resolution of the debt and claiming CDP rights – thus the language is buried among the other information and may not constitute effective notice. This is in contrast to the child support PON, which focuses primarily on the soon to occur consequences – offset and passport denial. Additionally, some taxpayers may not have the benefit of the passport language in the CDP notice at all because they received their CDP notices prior to the IRS including this language. At this time, the IRS has no plans to send a separate notice to these taxpayers.
The IRS’s current policy of relying exclusively on the CDP notice to provide pre-certification notice also ignores behavioral research. This is a topic I discussed last year in the Annual Report to Congress Most Serious Problem on Voluntary Compliance and in a related Literature Review on Behavioral Science Lessons for Taxpayer Compliance. One topic that came up repeatedly in the literature was the concept of salience, focussing on the timing and relevancy of communications. A simple way to increase the salience of the passport notice would be to issue a stand-alone notice shortly before the certification, similar to the child support PON that is issued 30 days prior.
The IRS needs to approach passport certifications from the point of view, “If we want people to do something, what’s the best way to make that happen?” Here, the IRS wants taxpayers to resolve their tax debts – either by fully paying the liability, entering into a payment plan, or having their accounts corrected if the liability is incorrect. A stand-alone notice, focussing only on the pending harm that will occur if the taxpayer does not resolve their account quickly, is likely to be successful in prodding taxpayers to take action. However, the IRS doesn’t plan to send out a separate notice other than the notice at the time of the passport certification, which triggers many kinds of actions.
In my next blog, I’ll discuss the actual operations of the passport certification process, showing how the IRS’s lack of notice leads to an inefficient and burdensome process.