ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – PROTECTING YOUR PASSPORT WHEN YOU OWE THE IRS
By Robert S. Schriebman
If you owe the IRS your passport may be in jeopardy. The IRS has the ability to inform the Secretary of State that you are a “seriously delinquent taxpayer.” This can cause your passport to be denied, revoked, or limited. Most tax advisors are at a loss when it comes to dealing with issues of passport endangerment. I recall attending a prestigious seminar attended by CPAs, Attorneys, and other professionals who dealt with tax controversies. One of the speakers addressed the audience and inquired if anyone had any experience in dealing with passport revocation issues. Not one hand went up including my own; just silence.
All that changed on June 25th when the US Tax Court issued its decision in Ruesch v. Commissioner (USTC, 154 T.C. No. 13). This article will discuss the Ruesch case. This is the first case that truly explained the rules surrounding passport issues. In an indirect way the Court also set forth strategies and tactics you can use to challenge this threat to your passport.
Looking at the Ruesch Case
Vivian Ruesch was assessed a stiff penalty by the IRS for failing to file information returns with respect to foreign corporations for the years 2005-2010. The assessment was made pursuant to IRC § 6038. The penalty alone was $160,000. Vivian did not pay the penalty and received the usual series of collection notices with a final notice allowing her to file for a Collection Due Process Hearing (CDP). She timely filed her CDP petition.
A few months later, Vivian received IRS Notice CP508C, Notice of Certification of Your Seriously Delinquent Federal Tax Debt to the State Department. In response to this notice, and while her CDP petition was pending, Vivian filed a petition in the US Tax Court. Her petition challenged the correctness of the IRS’ certification as well as her underlying liability for the penalties. In deciding that her matter was moot because of the pending CDP hearing, the Court set forth avenues to take upon receipt of the passport notice.
IRC § 7345 In a Nutshell
IRC § 7345 provides that if the IRS certifies to the Secretary of State (SOS) that a taxpayer has “a seriously delinquent tax debt,” the SOS may deny, revoke, or limit one’s passport. The IRS has the responsibility to also notify the taxpayer of the mailing of such certification (IRS Notice CP508C).
A seriously delinquent tax debt is a federal tax liability that exceeds $50,000 (adjusted for inflation). The IRS is also required to file a Notice of Federal Tax Lien (NTFL). There are times, however, when a seriously delinquent tax debt is not allowed to be sent to the SOS, or if the SOS has been so notified, the SOS is prohibited from enforcement. These are the key strategies set forth in the Ruesch case. Here are the exceptions set forth in IRC § 7345(b)(1):
- A seriously delinquent tax debt excludes a debt with respect to which collection is suspended because a Collection Due Process hearing has been requested or is pending.
- If the seriously delinquent tax debt is found to be erroneous.
If either of these two exceptions exist, the IRS must reverse its certification and notify the SOS and the taxpayer.
Going to Court (US Tax Court or US District Court)
If you have received an IRS notice that you have a seriously delinquent tax debt, you have the right to file a petition with the US Tax Court or the US District Court to determine if the certification was erroneous or the IRS failed to reverse a prior certification. These courts may order the IRS to notify the SOS that such certification was erroneous.
The US Tax Court or the US District Court have limited jurisdiction in these types of matters. This is a limited civil action. The law provides no specific time limit to bring this action either in the Tax Court or the US District Court. The only determination that the Court is allowed to make is whether the amount allegedly owed for certification has been accurately determined. One does not have the right to a full trial on the merits of the underlying assessment. If the certification should have been reversed, but the IRS failed to do so, the court can order the reversal of the determination. These are the only two avenues allowed in this type of matter.
In Vivian’s case, the US Tax Court could not do anything for her because she had a pending CDP petition. The US Tax Court cannot get involved until the CDP matter is over. If the CDP Settlement Officer reverses the certification, the Tax Court has nothing to do. The Tax Court’s hands were tied until the CDP hearing was over and Vivian was not satisfied with the results of the CDP hearing. She could then appeal to the US Tax Court or the US District Court.
The Impact of the CDP Process
When you owe the IRS, you will be given two chances to file a CDP petition. Filing a petition allows you to work out a payment arrangement, offer in compromise, hardship suspension, or a challenge to the correctness of the assessment. You have all these rights before you pay a dime, and while the CDP process moves forward, the IRS cannot take any collection action against you by way of a levy. The IRS can and does file a lien notice.
If you have received a seriously delinquent taxpayer notice, filing a CDP petition alone will force the IRS to decertify its determination and to reverse its position that the taxpayer’s debt is seriously delinquent. This prevents the SOS from getting involved with any passport issues.
The Rausch case taught us some good points about fighting back when you receive a seriously delinquent taxpayer notice. Here is what we learned:
- If you owe the IRS more than $50,000, your passport could be in jeopardy. The IRS is required to certify the delinquency and send it on to the SOS.
- If you timely file a CDP petition, your debt is not considered seriously delinquent unless and until the CDP process is over. These days this process can take more than one year.
- You have a right to go the US Tax Court to challenge a CDP determination and while the Tax Court matter is pending, you are not considered seriously delinquent (you may also go to the US District Court).
- We learned from the Rausch case that you cannot go to court to challenge the certification while your CDP matter is pending.
- You have the right to challenge the seriously delinquent taxpayer certification in the US Tax Court or the US District Court, but the jurisdiction of either court is limited.
In this current COVID-19 environment, most of us are not doing much traveling out of the country. Perhaps you are not too concerned about the status of your passport. Your passport may not be as important as it was in early 2020, and you may have decided to keep your traveling in the USA. But one day this will all change and we will be looking to take that overseas vacation or to meet face-to-face with business associates. The Ruesch case has given us ways of fighting back when you receive that IRS notice that your tax debt is now in the hands of the State Department.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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