Jane owes more than $75,000 in taxes, fees and interest to the IRS. She was aware of this substantial debt but had no idea that she could lose her passport because of it. She doesn’t understand what’s going on or what she can do.
One of your tax clients could be next.
Why is this happening?
More than one third of all Americans have a passport, but many don’t know about the 2015 Fixing America’s Surface Transportation (FAST) Act. It included a provision allowing the IRS to request that the Secretary of State deny, revoke or limit a U.S. passport upon the certification of a seriously delinquent tax debt (SDTD). A tax debt reaches the level of an SDTD when:
- The amount of a taxpayer’s tax, interest and penalties hit a $50,000 threshold (indexed for inflation, the current threshold is $51,000).
- The IRS filed a Notice of Federal Tax Lien.
- The period to challenge the lien expired, or the IRS issued a levy.
Upon receiving certification of an SDTD, the U.S. State Department generally won’t renew the taxpayer’s passport or issue a new passport. In other cases, it may revoke or place limitations on the taxpayer’s current passport.
The certification process is a complicated administrative procedure, but the effect is pretty straightforward: a grounded taxpayer. As intricate as the process is for the IRS, getting a debt decertified could be just as tricky.
What can Jane and other taxpayers do?
When Jane receives a Notice CP508C, she may think she only has two choices: pay the bill in full or make an alternate payment arrangement. The truth is, there are many options available.
Last year, the IRS released a statement outlining ways taxpayers can avoid getting the State Department involved in their back taxes. These options include:
- Paying the tax debt in full
- Paying the tax debt under an approved installment agreement, an offer in compromise or under the terms of a settlement agreement with the Department of Justice
- Having requested or have a pending Collection Due Process (CDP) appeal with a levy
- Having collection suspended because a taxpayer has made an innocent spouse election or requested innocent spouse relief
In some cases, extenuating circumstances such as bankruptcy, identity theft or hardship will prevent the IRS from notifying the State Department of the SDTD.
At first glance, someone might think an easy answer to the problem would be paying enough of the tax bill to bring the total under the $51,000 threshold. However, that won’t work. Paying it down won’t reverse the notification of certification once the debt has been certified.
There’s no administrative appeal process for the certification of Jane’s account. She can file suit in the U.S. Tax Court or District Court if she thinks the certification is inaccurate.
What can CPAs do?
Practitioners with clients like Jane should be proactive when attempting to resolve unpaid tax liability issues. Ask your clients with outstanding tax debts how they would like to address the problem. Remember:
- A pending installment agreement request will stop a CP508C letter from being issued. (Find a sample request here. )
- File a Form 12153, Request for a Collection Due Process or Equivalent Hearing, in response to Notice 3172 or 1058 and attempt to resolve the issue through a CDP hearing. This quick reference chart can help you lead your clients through the maze of IRS collection enforcement activity and help them determine the best course of action.
- Attempt to resolve cases at the lowest possible level and request installment agreements as soon as practically possible.
- Make sure your client files all previously unfiled tax returns or submits an estimated tax payment for the current year (if applicable). Have the appropriate collection information statement (e.g., Form 433-A or Form 433-F) completed and ready to go.
The process of decertification does work. If clients find out they’re subject to passport revocation for failure to pay tax debts, many avenues of assistance are available to get them back on track before they find themselves homebound.
By the way, Jane’s story has a happy ending. She paid her bill in full at which point her CPA contacted her local Taxpayer Advocate Service (TAS) office. Jane’s CPA and her local TAS advocate helped expedite the decertification process, allowing her to jet off to Europe as planned.
Larry Wolfe, CPA, is the owner of Larry J. Wolfe Ltd., in Skokie, Illinois, and serves as vice chair of the AICPA Tax Practice & Procedure Committee.
Harold D. Katz, CPA, is the owner of Katz LLC, in Chicago, Illinois.
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Originally published by AICPA.org