In my first blog on passport issues, I discussed the importance of providing notice to taxpayers prior to certifying their seriously delinquent tax debts to the Department of State (DOS). Once the IRS makes the certification, the DOS must deny the person’s passport application and it may revoke their passport, except in certain emergency and humanitarian situations. Under the IRS’s current policy, the only direct notice prior to the certification is through language buried in the middle of the CDP notice, which was not included at all for taxpayers who received their CDP notices prior to January 2017. This policy impairs due process rights and the taxpayer’s right to be informed and right to challenge the IRS’s position and be heard.
As the IRS begins certifications in the coming months, there will most certainly be taxpayers who are caught unaware when the IRS certifies their seriously delinquent tax debts to the DOS. At the start of the implementation, the DOS will only be denying passport applications and will implement the revocation program at a later date. Although the DOS will hold an applicant’s passport application open for 90 days to allow the taxpayer to resolve the tax debt, taxpayers may need their passports immediately for travel, such as upcoming business travel, which would not fall under the DOS’s discretion to grant a waiver for emergency or humanitarian reasons.
Today, I’d like to look at some examples of how the passport certification process will operate. These examples show how unnecessary certifications and reversals are inefficient for the IRS and burdensome to the taxpayer when prior notice to the taxpayer could have resulted in resolution of the tax debt. In the first set of examples, we see that simply paying the tax debt to decrease it to or below $50,000 (adjusted for inflation) is not enough to reverse the certification. However, if the IRS reverses the certification for another reason (for example the taxpayer enters into an IA), then the IRS cannot recertify the debt if it is currently at or below the $50,000 (adjusted for inflation) threshold.
Example 1: Paying Liability to or Below $50,000 (adjusted for inflation)
Taxpayer owes $45,000 for combined assessments for tax years 2013, 2014, and 2015. After the IRS assesses his 2016 return, the Taxpayer’s total assessed liability for all years is $55,000. The IRS has filed a Notice of Federal Tax Lien (NFTL) and the time period for requesting a Collection Due Process (CDP) hearing has lapsed. The IRS certifies the Taxpayer’s seriously delinquent tax debt to the DOS. The DOS denies the Taxpayer’s passport application. The Taxpayer pays $20,000 of his tax debt, bringing the total assessed liability down to $35,000. The Taxpayer needs his passport to travel for work, but the IRS is not required to reverse the certification because the Taxpayer does not meet one of the statutory or discretionary criteria for reversal.
Taxpayer owes $45,000 for combined assessments for tax years 2013, 2014, and 2015. After the IRS assesses his 2016 return, the Taxpayer’s total assessed liability for all years is $55,000. The IRS has filed an NFTL and the time period for requesting a Collection Due Process (CDP) hearing has lapsed. The IRS certifies the Taxpayer’s seriously delinquent tax debt to the DOS. The DOS denies the Taxpayer’s passport application. The Taxpayer enters into an IA with the IRS. The IRS reverses the certification and notifies the DOS. The Taxpayer defaults on the IA once the total assessed liability falls to $49,000 and makes no more payments. The IRS cannot recertify the Taxpayer at this time because the Taxpayer’s assessed tax liability is below the $50,000 threshold. The Taxpayer applies for and receives a passport from the DOS.
TAS will assist certified taxpayers in resolving their tax debts and correcting their accounts. While virtually all passport cases will meet TAS’s financial or systemic burden case criteria, I have also designated all passport denial and revocation cases as meeting TAS Case Criteria 9, Public Policy. However, the IRS has rejected my repeated requests to exclude already open TAS cases from passport certification. By definition, taxpayers who are working with TAS are working to resolve their seriously delinquent tax debts. The next set of examples demonstrates the harm to taxpayers caused by the IRS’s decision not to exclude open TAS cases from certification as part of its discretionary authority.
Example 2: TAS Case Opened
Taxpayer has a total assessed tax liability of $40,000, for which the IRS has filed an NFTL and the period for requesting a CDP hearing has lapsed. Taxpayer’s identity is stolen and the identity thief’s fraudulent return results in a balance due of $15,000. The IRS assesses this amount and files an additional NFTL. The Taxpayer does not timely respond to the CDP notice. The Taxpayer contacts TAS for assistance in having his account corrected. Before TAS is able to have an ID theft indicator placed on the account, the IRS certifies the seriously delinquent tax debt. Through TAS’s assistance, the IRS places an identity theft transaction code on the Taxpayer’s account while the Taxpayer works with TAS to come up with documentation to prove the ID theft. Because the IRS treats identity theft as a discretionary exception to the passport provisions, upon the placement of the ID theft transaction code, the IRS reverses the certification. The Taxpayer is able to apply for and receive a passport once the DOS receives notification of the reversal.
Taxpayer has a total assessed tax liability of $40,000, for which the IRS has filed an NFTL and the period for requesting a CDP hearing has lapsed. Taxpayer uses a return preparer to prepare his current return. The Taxpayer signs the return, but the return preparer alters the information on the return after the Taxpayer signs. The fraudulent return results in a balance due of $15,000. The IRS assesses this amount and files an additional NFTL. The Taxpayer does not timely request a CDP hearing. The Taxpayer contacts TAS for assistance in having his account corrected per IRM 25.24.2, Return Preparer Misconduct Victim Assistance Specialized Accounts Management, which provides procedures for removing the debt attributable to return preparer fraud. However, before TAS is able to have the account corrected, the IRS certifies the seriously delinquent tax debt. Unlike the identity theft victim, the Taxpayer is unable to apply for and receive a passport during the time he is working with TAS to have his account corrected. Once the Taxpayer finally succeeds in having his account corrected, and the total assessed liability returns to $40,000, the IRS reverses the certification because the certification is found to be erroneous.
Although the taxpayers in these examples ultimately have their certifications reversed, the IRS’s failure to exclude taxpayers from the certification list during the time their cases are open in TAS results in burden and harm to these taxpayers. This approach also results in extensive and unnecessary work for both TAS and the IRS. TAS has developed a process for excluding open TAS cases from the Private Debt Collection initiative, and it is baffling why the IRS will not adopt that procedure for passport certification cases.
The final example set shows the difference between a taxpayer who pays the tax debt below the $50,000 threshold while temporarily meeting one of the certification exclusions (in this case CNC status) and a taxpayer whose tax debt remains above the threshold.
Example 3: CNC status
Taxpayer’s total assessed tax liability is $55,000. The IRS certifies the seriously delinquent tax debt to the DOS. The Taxpayer requests and receives Currently Not Collectible (CNC) hardship status for the tax years comprising the liability. The IRS reverses the seriously delinquent tax debt certification. The IRS offsets the Taxpayer’s current refund in the amount of $6,000, reducing the liability to $49,000. The Taxpayer begins a new job, raising his income, and prompting the IRS to terminate the CNC status. The IRS cannot recertify the Taxpayer’s tax debt because it is currently below $50,000.
Taxpayer’s total assessed tax liability is $55,000. The IRS certifies the seriously delinquent tax debt to the DOS. The Taxpayer requests and receives Currently Not Collectible (CNC) hardship status for the tax years comprising the liability. The IRS reverses the seriously delinquent tax debt certification. The Taxpayer begins a new job, raising his income, and prompting the IRS to terminate the CNC status. The IRS recertifies the seriously delinquent tax debt. The Taxpayer makes payments to reduce his tax debt to $45,000. However, the IRS will not reverse the certification unless the Taxpayer receives CNC status again, or meets another statutory or discretionary criterion for reversal.
I believe that in many cases, a certification could be avoided by providing the taxpayer with a stand-alone notice prior to the certification. This notice would alert the taxpayer to the specific harm that will occur if he or she doesn’t resolve the tax debt and provide an opportunity to resolve the debt or challenge the determination. However, because the IRS does not currently provide such a notice, taxpayers will continue to be certified and will not resolve their tax debts until after the certification. This process burdens the taxpayer and causes extra work for the IRS, who must process the certification and reversal of the certification, when an adequate warning of the certification may have been enough to spur the taxpayer to resolve the debt.
The IRS’s approach ignores the entire reason for the notice (and for taxpayers’ right to be informed), which is to motivate the taxpayer to take action. Merely placing a random paragraph among many other pieces of important information may not be sufficient to put a person on notice such that they have the necessary knowledge and take the desired action. If the IRS really wants the taxpayer to resolve the tax debt, it would design its notices to prompt the taxpayer to take action. The notice sent contemporaneously with the certification is too late. This brings into question whether the IRS is actually trying to give the taxpayer notice and encourage the resolution of the tax debt.
Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog.
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.