On December 4, 2015, President Obama signed into law the “Fixing America’s Surface Transportation Act” (officially labeled the “FAST Act”) – P.L. 114-94. The bill’s primary takeaway is a 5-year, $305 billion plan to modify and modernize American transportation systems. However, hidden within the bill is a new Internal Revenue Code section – Section 7345 – which has the potential for drastic effects. It can enable the IRS to work with the State Department to modify or restrict passport issuance to specified delinquent taxpayers.
Specifically, new Section 7345 gives the IRS the ability to deny, revoke, or limit the passport of a taxpayer who owes greater than $50,000 in valid tax debts for which a levy or lien has already been filed by the Service. Importantly, this $50,000 “tax debt” number includes interest and penalties assessed on a tax amount owed. As provided by the exceptions to the “seriously delinquent tax debt” definition, the IRS does not have the power to make such modifications to the passport of an individual who has entered into an agreement with the IRS, which generally would include an installment agreement or an offer in compromise. However, the individual must also be timely making payments for this exception to apply. Thus, where an individual enters into an installment agreement and then defaults, the IRS’s ability to modify the passport comes back into play if the tax debt still exceeds $50,000. Additional exceptions are noted where a collection due process hearing is requested or pending or where innocent spouse relief (under Section 6015 of the Code) has been sought.
Section (c) of the new Code provision provides that, where an individual fully satisfies the debt owed (or the debt has become unenforceable), requests innocent spouse relief, requests a collection due process hearing, or enters into either an installment agreement or offer in compromise, the Service must notify the Secretary of State. Notice to the taxpayer of the certification is required under Section 7345(d). Grounds for challenging the certification are provided under Section 7345(e); however, grounds for challenge are limited to whether the certification was erroneous or whether it should have been reversed based on Section 7345(c) and do not include, for example, challenges based on the fairness of the certification under the facts involved.
Whether the IRS will utilize their new power of certification in all cases – or even in a majority of cases – is unclear. However, what is clear is that the new power enlarges the IRS’s arsenal for enforcing tax debts. Section 7345 incentivizes taxpayers to both utilize collection due process hearings when available and to enter into agreements with the Service regarding valid debts owed.
Patrick J. McCormick is an associate with the firm. He earned his J.D. from Vanderbilt University Law School in 2008, and his LL.M. from the New York University School of Law in 2009.Mr. McCormick handles an assortment of tax and estate issues, but specializes in the areas of international tax, offshore disclosures, tax controversy matters, and business planning techniques (including captive insurance companies). He regularly publishes articles and gives presentations on these and other areas of the law.