By Mary Lundstedt, Esq.

On April 5, 2018, the Chief Counsel’s Office provided advice in Notice CC-2018-005 to Chief Counsel attorneys who handle I.R.C. §7345 passport actions. The Chief Counsel’s Office detailed both the certification and reversal processes for “seriously delinquent taxpayers,” as well as the procedures for the judicial review of certifications. Lastly, the Notice indicates that since this is a new area of litigation, with questions still unanswered, these cases are ultimately to be coordinated with Procedure & Administration, Branches 3 and 4.

Guidance re Certification and Reversal Processes

Under the Fixing America’s Surface Transportation Act (FAST Act), the State Department must deny a passport application by any individual certified by the IRS as having a “seriously delinquent tax debt.” [1] Additionally, the FAST Act authorizes the State Department to revoke a passport held by an individual with seriously delinquent tax debt. The certification process itself is governed by I.R.C. §7345, which also provides taxpayers a limited right to judicial review.

The elements of a “seriously delinquent tax debt,” provided by the Notice, are as follows:

  • It is an unpaid, legally enforceable federal tax liability of an individual.[2]
  • The liability must be assessed.[3]
  • The liability must exceed $50,000.[4]
  • The IRS must have filed a notice of federal tax lien under I.R.C. §6323,[5] or levied under §6331 with respect to the liability.[6]

Under I.R.C. §7345(b)(2), “seriously delinquent tax debt” does not include, (1) a liability being paid timely pursuant to an installment agreement or an offer-in-compromise, and (2) a liability for which a collection due process (CDP) hearing or innocent spouse relief request is pending.[7]

Notice CC-2018-005 also advises that the IRS “will rely on automated systems to identify every module (electronic record of tax liability) on an individual’s account with an unpaid assessed tax liability that is not statutorily excepted from the definition of seriously delinquent tax debt or otherwise in a category excluded from certification.” Once identified, according to the Notice, the systems will total the amount of unpaid liabilities; if the resulting total exceeds the statutory threshold, then the taxpayer will be identified as having a seriously delinquent tax debt. The Notice clarifies that under these circumstances, a Transaction Code (TC) 971 Action Code (AC) 641 will then post to each module.

Next, according to the Notice, the Small Business/Self Employed Commissioner will make the certification, and the IRS will provide the list of all certified individuals to the State Department. Upon receipt of this list, the State Department will not issue a passport to a listed individual, and it may revoke an already-issued passport, except as necessary for return travel to the United States. Notice CC-2018-005 also states that along with the certification, the IRS will notify individuals of their certification by issuing them a CP508C Notice by regular mail. Among other things, the CP508C Notice will inform the individual of the right to judicial review in a federal district court or the Tax Court.

Furthermore, Notice CC-2018-005 provides that I.R.C. §7345(c) requires reversal of certification when:

  • Certification is found to be erroneous,
  • The seriously delinquent tax debt is fully satisfied, or
  • The debt ceases to be a seriously delinquent tax debt due to an exception under I.R.C. §7345(b)(2).[8]

Once a certified module is qualified for reversal, a TC 972 AC 641 will be posted to it, according to Notice CC-2018-005. Certification “will not be reversed until all modules covered by it have been fully satisfied or otherwise meet the criteria for reversal,” the Notice clarifies. After the TC 972 AC 641 is posted, the IRS will concurrently provide notice of the reversal to both the taxpayer and the State Department. The taxpayer will be notified in a CP508R Notice by regular mail.

Guidance re Judicial Review of Certifications

The Notice explains that per I.R.C. §7345(e)(1), any certified individual may bring a civil action to determine the validity of the certification or whether the certification should have been reversed. The action may be filed in either a federal district court or the Tax Court, according to the Notice. Note that if an action is filed in both federal district court and the Tax Court, the court where the first action was filed has sole jurisdiction.[9] Furthermore, if the court finds an erroneous certification, or that certification should be reversed, the court may order the IRS to notify the State Department.

Additionally, the Notice states that the Tax Court has proposed adding a new Title XXXIV to its Rules of Practice and Procedure. Generally, the proposed rules:

  • Describe the court’s jurisdiction,
  • Specify the title and content of a petition,
  • Require the filing of an answer, and
  • State when the case is deemed at issue.

The proposed rules also require, according to Notice CC-2018-005, that a petition include a copy of the CP508C Notice.

The Notice then presents a discussion of the three issues that are expected to be raised by petitioners in certification challenges (ones that the Code fails to specifically address). These are identified in Notice CC-2018-005 as challenges to the underlying liabilities, the period of limitations for bringing an action, and the scope and standard of review in certification actions.

First, the Notice emphasizes that judicial review under I.R.C. §7345 does not include review of the amount of the liability. Secondly, since I.R.C. §7345(e) lacks a specific period of limitations within which a certification action may be brought, the Notice explains that a period of six-years will apply.[10] Thus, individuals will have six years from the issuance of a certification notice to bring an action. Finally, as I.R.C. §7345(e) also fails to specify the scope or standard of review for certification actions, the Notice provides that “review should be limited to the Service’s records and whether the certification or failure to reverse the certification was ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.'”[11] Significantly, the Notice advises that for certification actions arising in Tax Court, I.R.C §7482(b)(1) places appellate venue in the U.S. Court of Appeals for the District of Columbia Circuit.

Notice CC-2018-005 then provides instructions for Chief Counsel Counsel attorneys as to how to handle very particular procedural aspects of certification actions in both the Tax Court and the District Courts. Included in the section for the Tax Court, is (1) a direction for attorneys to include the CP508C Notice along with the answer, in the event that the taxpayer neglects to attach it to the petition, (2) a description of five types of motions for attorneys to consider using, and (3) clarification that “a case may be resolved with a stipulated decision document when the Service erroneously certified a taxpayer, a basis for reversal of a valid certification currently exists, or the taxpayer concedes either that the certification is valid or that there is no basis for reversal.” In the context of the District Courts, the Notice states that the Department of Justice will represent the Government and indicates the source of the procedures which Chief Counsel attorneys should follow.

Coordinating I.R.C. §7345(e) Cases With the National Office

Finally, the Notice ends with the advice that:

“Chief Counsel attorneys should contact Branches 3 or 4 in Procedure & Administration with questions about these cases. Additionally, any document to be submitted to the Tax Court, except for answers not making affirmative allegations and motions to change caption, must be reviewed by those branches before filing. The same is true for any defense letters to be sent to the Department of Justice. To assist in the review, the following documents should be submitted with the document being reviewed: (1) petition or complaint, (2) any attachments to the petition or complaint, (3) a copy of the CP508C if not attached to the petition or complaint, and (4) a copy of the Form 4340 for each tax period giving rise to the certification.”

[1] See Fixing America’s Surface Transportation Act, Pub. L. No. 114-94, § 32101(e), 129 Stat. 1311, 1732 (2015).

[2] I.R.C. §7345(b)(1). Note that this excludes criminal restitution, FBAR penalties, and past-due support payments collectible under §§6305(a) and 6402(c).

[3] I.R.C. §7345(b)(1)(A).

[4] I.R.C. §7345(b)(1)(B). The amount is indexed for inflation. I.R.C. §7345(f). For 2018, the amount is $51,000. Rev. Proc. 2017-58.

[5] Collection due process rights under I.R.C. §6320 must have lapsed or been exhausted.

[6] I.R.C. §7345(b)(1)(C).

[7] Note that the Notice also provides that “In addition to these statutory exceptions, the Service is exercising discretion to exclude additional categories of liabilities from certification. The current categories of discretionary exclusions are listed in sections 5.1.12.27.4 and 5.19.1.5.19.4 of the Internal Revenue Manual. The categories are subject to change to ensure the integrity and effectiveness of the certification program.”

[8] According to Notice CC-2018-005, certification reversal will also result when the debt falls into one of the discretionary exclusions listed in sections 5.1.12.27.4 and 5.19.1.5.19.4 of the I.R.M. “either entirely or in combination with the circumstances listed in section 7345(c), or the taxpayer enters a combat zone or participates in a contingency operation within the meaning of section 7508(a).”

[9] I.R.C. §7345(e)(1).

[10] 28 U.S.C. § 2401(a).

[11] 5 U.S.C. § 706(2)(A).