Did you know that your U.S. passport could be denied, revoked, or not renewed if you owe significant back taxes? This is all thanks to a little-known rule under IRC Section 7345, which targets taxpayers with “seriously delinquent tax debt.” A taxpayer’s challenge to the rule as being unconstitutional has already failed.
The Price of Tax Debt
A “seriously delinquent tax debt” is more than just a hefty bill. It’s a federal tax debt (including interest and penalties) that’s over a certain amount, adjusted yearly for inflation. For 2024, this threshold is set at US$62,000. It becomes quite easy to exceed this threshold, especially for an American abroad who may have significant penalties for not filing various foreign information returns. The threshold includes not only interest and penalties, but also any other tax debt owed by the individual such as business taxes for which the taxpayer is personally liable or trust fund recovery penalties.
The IRS and State Department Tag Team
The IRS and the State Department work hand-in-hand to enforce this rule. When the IRS certifies a debt as seriously delinquent, it alerts the State Department, which can then act to deny the passport application or revoke the passport. The IRS has detailed guidelines on the tax debt certification process, including the notification steps.
Case Spotlight: Robert A. McNeil v. United States
In a notable case, Robert A. McNeil found his passport application denied because of tax debt. The District of Columbia Court of Appeals ruled that even though McNeil claimed he wasn’t properly notified about his delinquent status, the IRS certification of his debt was still valid. Essentially, the State Department’s action to deny his passport stood firm.
The Notification Game
Here’s how it works: when the IRS labels a tax debt as seriously delinquent and notifies the State Department, it also sends a notice to the taxpayer’s last known address (Notice CP508C). This is crucial because it gives taxpayers a chance to fix the issue before their passport application is denied or the passport revoked. The State Department typically holds off on denying the passport for 90 days, giving the taxpayer time to resolve any issues with the IRS. Tax debt legal issues are stressful, but taxpayers do have an opportunity to rectify the problems, including entering into a satisfactory payment arrangement with the IRS.
If the certification is reversed—for example, if the tax debt is paid or falls below the threshold amount, or becomes uncollectible because the statute of limitations has expired, or it was made in error—the IRS sends another notice (Notice CP508R) and promptly informs the State Department.
Court Ruling: No Notice? No Problem!
The McNeil case revealed an interesting twist. The IRS sent the taxpayer notifications to a Tucson, Arizona address where the taxpayer had never lived. Clearly, an IRS mistake. Since the taxpayer was never given notice of the IRS actions, he argued that the IRS certification of “seriously delinquent tax debt” was invalid. Despite this, the court decided that even without proper notice, the IRS certification was not erroneous. The State Department’s denial of McNeil’s passport was upheld despite the fact he never received notice due to a blatant IRS error. The court underscored that proper notice isn’t necessary for the IRS to certify a debt as seriously delinquent.
Americans Abroad Tax Challenges
Overseas taxpayers face additional hurdles. International mail can be unreliable, and the IRS may not have their current foreign address, especially for expatriates on shorter overseas postings. This means many Americans abroad might not get timely notice about their tax debt certification, making it difficult to take corrective action within the given 90-day window.
The Takeaway
The IRS’s power to certify tax debts as seriously delinquent without ensuring proper taxpayer notification can lead to significant passport problems, especially for those living outside the U.S. It’s crucial for taxpayers to stay on top of tax obligations and ensure the IRS has a current address to avoid any unpleasant surprises.
By staying informed and proactive, taxpayers can avoid the risk of being grounded by tax debt. After all, dealing with taxes is challenging enough without having to cancel travel plans. The key is taking early action before the IRS certifies the tax debt over to the Department of State. Prevent the headaches of travel restrictions due to tax debt, but move quickly. Get professional help to regain U.S. tax compliance. It may be possible to avoid all tax penalties for overseas Americans and reduced penalties for those stateside.
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