The U.S. Secretary of State now has the authority to deny, revoke or limit a passport of a taxpayer with a seriously delinquent tax debt as the rule is labeled. Enforcement of this rule would be the result of a certification by the IRS to the State Department. Business people who travel frequently must pay careful attention as the test for the determination of a seriously delinquent tax debt could put many taxpayers in jeopardy of having a passport problem.
A seriously delinquent tax debt has two components:
- The dollar amount is easy to identify as it is $50,000 of an unpaid, legally enfor-ceable Federal tax liability of an individual. This sounds like a large amount but tax assessments can encompass more than one tax year. Furthermore, interest and penalties can quickly increase the dollar amount of the delinquency. This will force those who are required to travel past the U.S. borders to make sure their taxes are paid. It may also put their employment in jeopardy further compounding the financial mess.
- The time element requires the tax to be assessed which is really not a very high hurdle. For taxpayers that have a liability but lack the funds to pay, this assessment period will commence upon filing of their tax return reflecting the tax deficiency. We always advise taxpayers to file tax returns timely even with a deficiency to ameliorate the assessment of late filing penalties, and this advice will not change but certainly human nature may cause certain taxpayers to ignore this advice for fear of starting the clock on losing the ability to travel.
For taxes that are assessed pursuant to an IRS examination, taxpayers will have an additional incentive to dispute the assessment first through administrative appeals and then formally through the court system. Of course, disputing an assessment requires a commitment to time and the related costs, and should be done only when the taxpayer has a legitimate position. For taxpayers who decide to dispute the assessment, the day that a certification would be made could be set back for several months and likely more than a year.
The second time element requires a notice of lien filing and the period to dispute the lien to have lapsed, or a levy being made against the taxpayer. Typically, a notice of federal tax lien is made before a levy is made. The dispute of the lien filing will be an administrative hearing to be requested within 30 days of the receipt of the notice of federal lien by the taxpayer, so the process will proceed quickly.
A major concern is that once the IRS sends the certification to the State Department which takes action, the taxpayer is on a governmental list.
Taxpayers are to be taken off the list upon the:
- Full payment of the tax debt (not simply below the $50,000 threshold);
- Debt becomes legally unenforceable;
- Granting of innocent spouse relief for the tax debt;
- Approval of an installment arrangement; or
- Offer in compromise with the IRS or the finding in a hearing that the certification is erroneous.
The life of an executive, manager, business owner or anyone that relies on traveling outside the U.S. will be severely compromised if their name is placed on the list. Failure to comply with timely payment of taxes must be avoided. The best medicine will be to prevent the assessment in the first place with proper compliance and a strong defense of any proposed assessment.
