Congress has a sneaky habit of attaching tax bills to end-of-the-year highway funding legislation. HR22, the Surface Transportation Reauthorization and Reform Act of 2015,” has tucked into Title 52 a nasty little tax ditty that creates new Internal Revenue Code (IRC) Section 7345, “Revocation or Denial of Passport in Case of Certain Tax Delinquencies,” which begins:

“(a) In general.—If the Secretary (of State) receives certification by the Commissioner of Internal Revenue that any individual has a seriously delinquent tax debt in an amount in excess of $50,000, the Secretary shall transmit such certification to the Secretary of State for action with respect to denial, revocation, or limitation of a passport….”

Seriously delinquent tax debt

Under Section 7345, seriously delinquent debt means tax debt over $50,000 on which IRS has filed a notice of federal tax lien or has issued a notice of levy but does not include a tax debt:

1. Being paid in a timely manner under an installment agreement or offer in compromise.
2. On which collection efforts have been suspended during the pendency of a collection due process hearing.
3. On which collection efforts have been suspended during the pendency of a request for innocent spouse relief from joint and several liability on a jointly filed income tax return.

Notice of federal tax lien

Note that a federal tax lien is created automatically when a taxpayers has unpaid tax debts. But, IRS will record its lien, meaning file a notice of federal tax lien, to give notice to the world thereby perfecting its priority over subsequent creditors. This is done rather routinely, although the taxpayer may ask for a collection due process hearing if he or she believes the lien recording was inappropriate.

Notice of levy

The IRS mails a notice of intent to levy to inform a delinquent taxpayer that it is about to seize money from his or her bank accounts, garnish wages, or take other assets upon which it has the right to levy.  The taxpayer will also  at least once receive a notice informing him or her of the right to obtain a collection due process hearing before IRS executes the levy.

$50,000 threshold of tax debt

Even tax debt over $50,000 incurred before the effective date of this bill would trigger notification to the Secretary of State. Also, the $50,000 amount will be adjusted for inflation each year in increments of $1,000, beginning in 2016.

Secretary of State may not issue passport to seriously delinquent taxpayer

The bill mandates that the Secretary of state, upon receipt of the certification that a taxpayer is seriously delinquent, shall not issue a passport to the taxpayer except in emergency circumstances or for humanitarian reasons.

Additional discretionary action the Secretary of State may take with regard to seriously delinquent taxpayer

• Revoke a passport previously issued.
• Limit a previously issued passport only for return travel to the U.S.
• Issue a limited passport that only permits return travel to the U.S.

Likelihood of passage

The Senate and House have already passed similar versions of the bill, now in conference committee, and  it is almost certain to become law, effective January 1, 2016.  Since attached to a highway funding bill, presidential veto seems unlikely.

Impact of this bill becoming law 

• Taxpayers who plan to travel will have to deal with tax debts over the threshold amount lest the State Department refuse to issue a passport or revoke  an existing passport.
• U.S. Expatriates who are out of compliance and may owe more than $50,000 will have to make arrangements to come into compliance if they want to keep or renew their passports. Expatriates may face hardships because they need their passports for both travel and identification, e.g., opening bank accounts, obtaining work visas or residency cards and school registrations for children.
• Americans abroad often don’t receive notices sent by IRS due to faulty addresses. Thus, an expat may not know that a U.S. tax assessment has been made and lien recorded, or that a levy notice has been mailed, and great inconvenience or hardship may occur if his or her passport is revoked or not renewed.
• It is unclear how efficient IRS will be in notifying the Secretary of State that a seriously delinquent tax debt has been paid or how quickly the Secretary of State, so notified, will act to issue or renew a blocked passport or reissue a revoked passport.
•  Presumably, IRS will not notify the Secretary of State of a serious tax delinquency until a taxpayer’s thirty days within which to assert collection due process rights, following the filing of a notice of federal tax lien, have expired.  But, IRS would have to promulgate rules disclosing how it would apply this provision.
• Some have argued that the new bill is unconstitutional but we shall have to wait to see if the bill once enacted is challenged in court. Delays could cause great inconvenience, even hardship despite the emergency relief provision, to taxpayers by severely restricting one’s right of freedom of movement and exit and entry out from and into the U.S.

Final comments

• Taxpayers who may be impacted by this law may want to make offers in compromise through the collection due process procedures, since merely submitting an offer outside of the collection due process regime will not, under the law, prevent one’s passport from being revoked, limited or not renewed, if a tax lien has already been recorded.

• Expatriates wanting to keep U.S. citizenship should consider the Streamlined Filing Compliance Procedures as a straightforward and reasonably certain means by which to come into compliance and prevent unexpected passport problems from arising.

• The $50,000 tax threshold seems far too low to trigger such a serious government action against U.S. citizens who, after all, are not tax criminals.

© 2015 by Robert S. Steinberg, Esquire
AV rated (preeminent) by Martindale Hubbell www.steinbergtaxlaw.com