A taxpayer’s US passport can be denied issuance, renewal and can even be revoked, if the taxpayer has so-called “seriously delinquent tax debt” per IRC Section 7345. I have blogged about this before – here and here. Generally, a “seriously delinquent tax debt” is an individual’s unpaid, legally enforceable federal tax debt (including interest and penalties) that totals more than US$55,000 (this is the 2022 amount; the figure is adjusted yearly for inflation).
The State Department works with the Internal Revenue Service (IRS) to enforce these rules. The IRS has a detailed information page explaining the process and the rules, which include notice to the taxpayer that the IRS has certified seriously delinquent tax debt to the State Department.
In Robert A. McNeil v. United States, (No. 21-5161 September 20, 2022) decided by the District of Columbia Court of Appeals just last month, it was held that IRS’ failure to send the taxpayer notice that his tax debt was “seriously delinquent” did not mean that the IRS determination was erroneous. In other words, it could be acted upon by the State Department and the passport denied.
The saga started when Mr. McNeil’s US passport application was denied for “seriously delinquent tax debt”. Before delving into McNeil, let’s look at the “notice” provisions of the “seriously delinquent tax debt” certification process.
The Process and Notification
When a “seriously delinquent tax debt” notification is sent by the IRS to the State Department, notice is simultaneously sent by the IRS to the taxpayer. Such taxpayer notice is very important because it provides the taxpayer with an opportunity to resolve the issues and not lose the rights associated with having a valid passport. The IRS will send the taxpayer Notice CP508C at the time the IRS certifies seriously delinquent tax debt to the State Department. The taxpayer notice is sent by regular mail to the taxpayer’s last known address. Before denying a passport, the State Department will hold the passport application for 90 days allowing the taxpayer to resolve any erroneous certification issues, make full payment of the tax debt or enter into a satisfactory payment arrangement with the IRS.
A certification can also be reversed. The IRS will send the taxpayer Notice CP508R at the time it reverses certification. The IRS will reverse a certification when the tax debt is fully satisfied or becomes legally unenforceable; the tax debt is no longer seriously delinquent, or the certification is erroneous. The IRS will make this reversal within 30 days and provide notification to the State Department as soon as practicable.
Actual Notice to the Taxpayer Not Required
The District Court opinion provides the McNeil facts: The IRS sent the taxpayer notifications to a Tucson, Arizona address where the taxpayer had never lived. Clearly, an IRS screw-up. Since the taxpayer was never given notice of the IRS actions, he contended that the IRS certification of “seriously delinquent tax debt” was invalid. The court did not agree and stated:
“Even if McNeil is able to prove that he never received these Notices, … it would not mean that the IRS’s certification was erroneous. [Internal Revenue Code Section 7345] does not say that a flawed or failed notice renders a certification erroneous. ….Subsections (a) and (b) describe when the… Secretary of the Treasury must transmit certification to the Secretary of State and identify which debts qualify as “seriously delinquent tax debt.” Neither subsection says that proper notice is an element of or a prerequisite to a proper certification by the IRS of a seriously delinquent tax debt. In fact, subsection (d) says that notice to the taxpayer should be “contemporaneous[ ]” with certification to State, so it logically cannot be a prerequisite to that certification…. Further, because subsection (e) includes no statute of limitations, there is no reason why improper notice under subsection (d) would prejudice a taxpayer who, like McNeil, does not learn about the certification of his debt in a sufficiently timely manner. … The text of the statute suggests that the purpose of the notice requirement is to inform the debtor “in simple and nontechnical terms of the right to bring a civil action under subsection (e).”… Therefore, McNeil’s argument concerning the notice requirement fails because even if notice was not effected here, it would not mean that the IRS’s certification of his debt to the State Department was erroneous.”
The D.C. Circuit Court of Appeals affirmed the district court. At the end of the day, the taxpayer’s passport application was denied even though he never received notice due to a blatant IRS error. The court’s legal mumbo jumbo justification simply seems outrageous to me.
Americans Abroad at Greatest Risk
US citizens living overseas are at the greatest risk for trouble with the passport denial rules for various reasons. First, receiving timely notification of the certification is often particularly challenging since international mail is often unreliable and the IRS may not have the taxpayer’s recent foreign address on record. The tax rules require only two forms of taxpayer notice (1) a contemporaneous notice issued to the taxpayer at the time of the certification to the State Department, or (2) when the certification is reversed by the IRS. The contemporaneous notice in (1) is issued “contemporaneous” with the certification to the State Department. Trust me, overseas mail delivery does not provide US taxpayers living abroad with sufficient time to take corrective action.
A typical comment on a US expat forum:
I recently had a regular air mail letter from the IRS take 8 weeks to get to France from the US. Good thing it got here ten days before the “absolute deadline for response” so I was able to respond in time. Of course, the IRS didn’t have anyone working the phones and their fax number didn’t work, so I emailed the docs to my brother in the US and had him print them and Express Mail them to the IRS. With receipts all ’round of course.
In addition, even if the American abroad does not owe taxes due to application of the special foreign earned income and housing exclusions for those living abroad, they can be hit with penalties for owning non-US accounts or assets if not properly reported to the IRS. Foreign information return penalties (e.g., Form 8938, Form 5471, Form 3520) can result in very high amounts. Since penalties count in the calculation, they can quickly add up and trigger “seriously delinquent tax debt.”
Posted October 27, 2022
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