The IRS is now utilizing two menacing collection alternatives. First, the IRS is now assigning collection duties to private collection agencies which are compensated on a contingent fee basis. Second, taxpayers who owe delinquent taxes could lose their right to a United States passport.
If the IRS is bugging you about your unpaid taxes, what if it is a private debt collector collecting for the IRS? That is now a reality, since President Obama has signed the 5-year infrastructure spending Bill. It added private IRS collectors as part of H.R. 22 – Fixing America’s Surface Transportation Act, the “FAST Act.” What does a private IRS have to do with highway funding, you might ask? The answer is money.
Congress wants more of it collected from taxpayers, especially what the IRS considers to be hard to collect tax bills. In fact, for some hard to collect bills, the law now requires—rather than just permits—the IRS to use private collectors. Many people think that having the IRS farm out collection work to private contractors is a bad idea. Last year, National Taxpayer Advocate Nina Olson advocated against it in a letter. She said the 2006- 2009 program using private collectors didn’t even raise revenue.
The IRS has gone in for private collectors twice over the last 18 years. And although those programs were not especially successful, Congress has gone back to it in a big way. Congress included it in the FAST Act, and the President signed it into law. Here are nine things you should know:
1. First, the private collector usually will contact the taxpayer by letter.
2. If the taxpayer’s last known address is incorrect, the private collector searches for the correct address. Next, the private collector will telephone the taxpayer to request full payment.
3. If the taxpayer cannot pay in full right away, the private collector offers an installment deal for up to five years.
4. If the taxpayer is unable to pay even over five years, the collector asks for taxpayer financial information to see what sort of deal the taxpayer should get. There are controls on financial data, but there is considerable worry about having taxpayer data in private hands.
5. Private collectors cannot accept payments. Do not pay them directly!
6. The Fair Debt Collection Practices Act applies to private collectors. This is the same law that applies to collectors in other circumstances. Notify the collection agency that you refuse to deal with them and that it must cease further communications.
7. There are many reports required under the law. Congress and the Treasury Department are trying to determine if private collection is efficient and how well it works.
8. In some cases, the IRS is actually required to use private collectors, where:
• The tax bill is not being collected because of a lack of IRS resources or the IRS’ inability to locate the taxpayer.
• More than 1/3 of the statute of limitations has expired, and no IRS employee has been assigned to collect it; and
• The tax bill has been assigned for collection, but more than a year has passed without any interaction.
9. Some tax bills cannot go to private collectors, as where:
• There is a pending or active offer-in-compromise or installment agreement;
• It is an innocent spouse case;
• The taxpayer is deceased, under age 18, in a designated combat zone, or is a victim of identity theft;
• The taxpayer is under IRS audit, in litigation, criminal investigation, or levy; or
• The taxpayer has gone to IRS Appeals.
Revocation or Denial of Passports
The passport provision became official, when President Obama signed the 5-year infrastructure spending Bill. It added a new section 7345 to the Internal Revenue Code. It is part of H.R. 22 – Fixing America’s Surface Transportation Act, the “FAST Act.” The law says the State Department can revoke, deny or limit passports for anyone the IRS certifies as having a seriously delinquent tax debt in an amount in excess of $50,000.
IRC § 7345 authorizes the IRS to certify that to the State Department. The department generally will not issue or renew a passport to you after receiving certification from the IRS.
Upon receiving certification, the State Department may revoke your passport. If the department decides to revoke it, prior to revocation, the department may limit your passport to return travel to the U.S.
Certification Of Individuals With Seriously Delinquent Tax Debt
Seriously delinquent tax debt is an individual’s unpaid, legally enforceable federal tax debt totaling more than $50,000* (including interest and penalties) for which a:
• Notice of federal tax lien has been filed and all administrative remedies under IRC § 6320 have lapsed or been exhausted or;
• Levy has been issued.
Some tax debt is not included in determining seriously delinquent tax debt even if it meets the above criteria. It includes tax debt:
• Being paid in a timely manner under an installment agreement entered into with the IRS.
• Being paid in a timely manner under an offer in compromise accepted by the IRS or a settlement agreement entered into with the Justice Department.
• For which a collection due process hearing is timely requested in connection with a levy to collect the debt.
• For which collection has been suspended because a request for innocent spouse relief under IRC § 6015 has been made.
Before denying a passport, the State Department will hold your application for 90 days to allow you to:
• Resolve any erroneous certification issues.
• Make full payment of the tax debt.
• Enter into a satisfactory payment alternative with the IRS.
There is no grace period for resolving the debt before the State Department revokes a passport.
Taxpayer Notification - Notice CP 508C
The IRS is required to notify you in writing at the time the IRS certifies seriously delinquent tax debt to the State Department. The IRS is also required to notify you in writing at the time it reverses certification. The IRS will send written notice by regular mail to your last known address.
Reversal Of Certification - Notice CP 508R
The IRS will notify the State Department of the reversal of the certification when:
• The tax debt is fully satisfied or becomes legally unenforceable.
• The tax debt is no longer seriously delinquent.
• The certification is erroneous.
The IRS will provide notice as soon as practicable if the certification is erroneous. The IRS will provide notice within 30 days of the date the debt is fully satisfied, becomes legally unenforceable or ceases to be seriously delinquent tax debt.
A previously certified debt is no longer seriously delinquent when:
• You and the IRS enter into an installment agreement allowing you to pay the debt over time.
• The IRS accepts an offer in compromise to satisfy the debt. • The Justice Department enters into a settlement agreement to satisfy the debt.
• Collection is suspended because you request innocent spouse relief under IRC § 6015.
• You make a timely request for a collection due process hearing in connection with a levy to collect the debt.
The IRS will not reverse certification where a taxpayer requests a collection due process hearing or innocent spouse relief on a debt that is not the basis of the certification. Also, the IRS will not reverse the certification because the taxpayer pays the debt below $50,000.
Judicial Review Of Certification
If the IRS certified your debt to the State Department, you can file suit in the U.S. Tax Court or a U.S. District Court to have the court determine whether the certification is erroneous or the IRS failed to reverse the certification when it was required to do so. If the court determines the certification is erroneous or should be reversed, it can order reversal of the certification.
IRC § 7345 does not provide the court authority to release a lien or levy or award money damages in a suit to determine whether a certification is erroneous. You are not required to file an administrative claim or otherwise contact the IRS to resolve the erroneous certification issue before filing suit in the U.S. Tax Court or a U.S. District Court.
Payment Of Taxes
If you can’t pay the full amount you owe, you can make alternative payment arrangements such as an installment agreement or an offer in compromise and still keep your U.S. passport. If you disagree with the tax amount or the certification was made in error, you should contact the phone number listed on Notice CP 508C. If you’ve already paid the tax debt, send proof of that payment to the address on the Notice CP 508C. If you recently filed your tax return for the current year and expect a refund, the IRS will apply the refund to the debt and if the refund is sufficient to satisfy your seriously delinquent tax debt, the account is considered fully paid.
If you need to verify whether your U.S. passport has been cancelled or revoked, you should contact the State Department by calling the National Passport Information Center at 877-487-2778. If you need your U.S. passport to keep your job, once your seriously delinquent tax debt is certified, you must fully pay the balance, or make an alternative payment arrangement to keep your passport. Once you’ve resolved your tax problem with the IRS, the IRS will reverse the certification within 30 days of resolution of the issue.
If you’re leaving in a few days for international travel and need to resolve passport issues, you should call the phone number listed on Notice CP 508C. If you already have a U.S. passport, you can use your passport until you’re notified by the State Department that it’s taking action to revoke or limit your passport.
If the Secretary of State decides to revoke a passport, the Secretary of State, before making the revocation, may:
(a) Limit a previously issued passport only for return travel to the United States;
(b) Issue a limited passport that only permits return travel to the United States.
If your passport is cancelled or revoked, after you’re certified, you must resolve the tax debt by paying the debt in full, making alternative payment arrangements or showing that the certification is erroneous. The IRS will notify the State Department of the reversal of your certification within 30 days of the date the tax debt is resolved.
Robert E. McKenzie of the law firm of Arnstein & Lehr LLP of Chicago, Illinois, concentrates his practice in representation before the Internal Revenue Service and state tax agencies. He previously served as a member of the IRS Advisory Council (IRSAC) which is a group appointed by the IRS Commissioner from 2009 to 2011.