Spring Break in Mexico -- Think Again if you Owe the IRS

Was the Grinch in Congress last winter? The FAST Act, 2015 Fixing America's Surface Transportation Act, did much more than fix our nation’s highways when enacted on December 5, 2015. The FAST Act broke down previous prohibitions that prevented the IRS from sharing information with the State Department. It did so in order to allow the State Department to punish U.S. taxpayers who owe money to the IRS by revoking their existing passports or refusing to issue or renew what would otherwise be a valid passport.

The threshold for outstanding tax, penalty and interest is amazingly low at just $50,000 for such a serious restriction on the rights of a U.S. citizen. The IRS will certify that a taxpayer has a “seriously delinquent debt” at $50,000 and ask the Secretary of State to take action with respect to denial, revocation, or limitation of the taxpayer’s passport. In addition to the amount of the delinquency requirement, the IRS must have also already filed a tax lien or a notice of levy on the delinquency. Thus, the IRS may be encouraged to move forward with liens and levy notices sooner in the collection process which would decrease the effectiveness of the IRS’ ability to negotiate with wealthy taxpayers capable of raising funds through alternative sources not subject to lien or levy such as loans from family members or friends. This type of negotiation usually occurs prior to the IRS filing a lien or levy notice.

All hope is not lost as there are ways to postpone and hopefully avoid the dreaded certification. First, enter into an installment agreement with the IRS. Second, enter into an offer in compromise with the IRS. Third, obtain spousal relief from the IRS. Finally, fourth, exercise your rights to a Collection Due Process hearing. Interestingly, these are all alternatives that can bring about a resolution of a taxpayer’s dispute with the IRS regardless. If all else fails, expect a creative taxpayer to find a way to keep the debt below the $50,000 threshold (indexed for inflation).

At the end of the case, tax practitioners should review the methods available to remove the certification from the State Department record.