The IRS has a lot of tools available to help it collect unpaid taxes. This includes liens, levies, and even seizing property.
Congress added the ability for the IRS to certify passports for those who owe back taxes and have refused to pay. Congress provided a judicial remedy for erroneous certifications. There have not been all that many court cases that have considered these “passport cases” yet.
This brings us to the Ezekwo v. Commissioner, T.C. Memo. 2022-54, case. The facts of the case provide an opportunity to consider the IRS’s passport certification rules and options for contesting an erroneous certification.
Facts & Procedural History
The taxpayer filed tax returns for 2003-2006 and 2010, but failed to pay the tax reported.
In 2006, the taxpayer requested a collection due process hearing for the 2003-2004 tax years. The request was late, so the IRS treated the request as an equivalent hearing.
In 2021, the IRS certified the taxpayer as an individual owing a seriously delinquent tax debt arising from 2003-2006 and 2010.
The IRS concurrently sent the taxpayer a Notice CP508C, Notice of Certification of Your Seriously Delinquent Federal Tax Debt to the State Department. The taxpayer owed $90,201 (including interest of $28,912).
The taxpayer filed a tax court petition to challenge the passport revocation.
Section 7345 was part of the FAST Act in 2015. It allows the IRS to certify and notify the Secretary of State that an individual has a seriously delinquent tax debt. It then authorizes the Secretary of State to deny, revoke, or limit the individual’s passport.
There are several restrictions and nuances that apply. First, naturally, the certification only applies to an individual. This means that only taxes that are paid by individuals trigger these rules. A taxpayer who operates their business through a C corporation and fails to pay taxes does not trigger these rules. The same goes for certain trusts, etc.
Second, the IRS can only make this certification if the individual owes back taxes to the Federal government. The back taxes have to be “seriously delinquent.” This means that (1) the tax was assessed (i.e., recorded as owing on the IRS’s books), (2) an amount greater than $50,000 (indexed for inflation), and (3) the IRS has either filed a Lien Notice or the IRS issued a levy to collect the tax. You’ll note from these requirements that the tax has to be greater than $50,000. This includes penalties and interest that accrue on the unpaid tax. You’ll also note that the IRS has to take some actions to collect, be it a lien or levy, before these rules are triggered. The IRS often does not issue liens or levies for taxpayers who owe back taxes. If it does, it may not do so for many years after the taxes are first due.
Third, there are exceptions that, if they apply, bar the IRS from making this certification. The certification is not to be made if the taxpayer is making payments according to an installment agreement with the IRS or satisfied by an offer in compromise or there is a pending collection due process hearing or innocent spouse relief request. This raises the stakes for errors the IRS makes in processing installment agreement payments. It also ups the stakes to comply with the five-year rule for offer in compromises (that the taxpayer has to be compliant with their taxes for five years after the offer is accepted by the IRS). With respect to the collection due process hearing request or innocent spouse relief request, it should be noted that the IRS often fails to respond to these requests. The taxpayer who submits them may have to wait years to get a response from the IRS. The IRS is barred from making this certification during this time period.
IRS Passport Notice
The IRS only has 30 days to notify the Secretary of State once the debt is no longer owed, an installment agreement or offer is accepted, etc.
It also has to send the taxpayer notice of its certification. This is the Notice CP508C, Notice of Certification of Your Seriously Delinquent Federal Tax Debt to the State Department, noted above. This Notice provides an 800 number for the IRS. Taxpayers may have some luck in working with the IRS to have the certification reversed. Taxpayers should consider the circumstances discussed below with the IRS.
If the IRS does not reverse its certification, Congress provided a judicial remedy. This is not explained in the IRS’s notice.
The Notice does not advise taxpayers of their right to file suit in U.S. Tax Court if they disagree with the certification.
Court Review of Passport Certification
Section 7435(e) authorizes the U.S. Tax Court or District Court to “determine whether the certification was erroneous or whether the Commissioner has failed to reverse the certification.” The court can then order the IRS to notify the Secretary of State that the certification was erroneous. There is no time limit for the taxpayer to bring this suit.
The taxpayer in the present case filed suit in U.S. Tax Court under Section 7435(e). However, according to the court, the taxpayer did not have a valid basis for contending that the certification was erroneous. She owed more than $50,000, the IRS sent the certification notice to the taxpayer, the IRS had issued both lien and levy notices, and there was no pending collection due process or innocent spouse request, and the taxpayer did not have an installment agreement in place. As such, the court was not able to assist the taxpayer in this case.
When Certification is Erroneous
While the court was not able to help the taxpayer in this case, the case highlights the circumstances in which others may successfully contest their passport certifications.
For example, simply requesting innocent spouse relief can avoid having this certification. Working out a temporary installment agreement can work. Paying the balance down to $50,000 (adjusted for inflation) can work. Filing a timely collection due process hearing request can work. This is in addition to successfully challenging the underlying tax assessment or waiting out the collection statute.
Taxpayers who receive the IRS’s notice that their passport has been certified to the State Department should consider their options. There are numerous “outs” that can result in the passport certification being reversed. Taxpayers may also be able to plan their affairs so that the certification can be reversed and a new passport obtained, with the hope that the Secretary of State does not take the steps to revoke the new passport. This is one of several options that should be discussed with a tax attorney.