Second Circuit Affirms Tax Court that IRS Withdrawal of Certification of Seriously Delinquent Tax Debt to Secretary of State Makes § 7435 Proceeding Moot (2/1/22)

In Ruesch v. Commissioner, 25 F. 4th 67 (2d Cir. 1/27/22), GS here, the Court affirmed the Tax Court's holding that the § 7345 proceeding was moot where the IRS withdrew the "seriously delinquent tax debt" certification to the Secretary of State. The Tax Court opinion is Ruesch v. Commissioner, 154 T.C. 289 (2020), TC here at Dkt #25 and GS here.

In addition to holding that the § 7345 proceeding was mooted by the withdrawal of the certification, the Tax Court also held (from the syllabus):

Held: We do not have jurisdiction, under IRC sec. 7345 or otherwise, to consider in this case petitioner's challenge to her underlying liability for the penalties.

 The Second Circuit addressed that issue as follows (emphasis supplied by JAT):

   Even if the Tax Court had jurisdiction to assess the validity of Ruesch's underlying debt, Ruesch had already received the only relief she could obtain under the statute, namely, reversal of her certification as an individual with "seriously delinquent tax debt." See 26 USC § 7345(e)(2). Since there was no further relief the Tax Court could have provided under the statute, and since the statute provided Ruesch's only claimed basis for relief, it should have determined that Ruesch's remaining claims were moot. n3
   n3 We note that Ruesch may yet have the chance to challenge her underlying liability in Court. That liability is currently the subject of an IRS appeals process that has still to run its course. See 26 USC § 6320. After receiving a final determination through that process, Ruesch will be able, if necessary, to "petition the Tax Court for review of such determination (and the Tax Court shall have jurisdiction with respect to such matter)." Id. § 6330(d)(1); see id. § 6320(c). If Ruesch continues to object to the IRS's position regarding her underlying liability, she will eventually have her day in Court. For now, however, there is nothing further for our Court or the Tax Court to do.

 Two points about this:

Agostino & Associates Monthly Journal of Tax Controversy Articles of Interest to Tax Crimes Enthusiasts (12/27/17)

Tax Crimes enthusiasts should regularly read Agostino & Associates Monthly Journal of Tax Controversy.  The December 2010 edition, here, has the following articles of interest:

• Frank Agostino and Edward Mazlish, Protecting the Taxpayer Facing Passport Revocation (Agostino & Associates Monthly Journal of Tax Controversy December 2010)
• Frank Agostino and Valerie Vlasenko, Fifth Amendment Privilege in Tax:  How to Keep the Case Moving While Protecting the Taxpayer (Agostino & Associates Monthly Journal of Tax Controversy December 2010)

Update on Passport Revocation, Denial or Limitation for Seriously Delinquent Tax Debts (2/1/17)

A new article has good information on the state of § 7345, here, dealing with potential State Department denial, revocation or limitation of use of the U.S. passport. Jim Buttonow, Ten things you need to know about passport restrictions on delinquent taxpayers (TaxProToday 1/31/17), here.  I previously wrote on the subject, New Transportation Bill, FAST, Adds Some Tax Provisions (Federal Tax Crimes Blog 12/7/15; 2/27/16), here, but I strongly recommend the TaxProToday article.

I offer some excerpts for new information since my blog, but encourage readers to read the entire article:

4. What will happen to the person who owes seriously delinquent tax debt? 

Starting in late March, the IRS will send Letter 508C, Notice of certification of your seriously delinquent federal tax debt to the State Department, to the taxpayer’s last-known address to notify the taxpayer that they are certified as owing seriously delinquent tax debt. At that time, the IRS will also send the certification to the State Department. 

* * * * 

6. Can taxpayers just pay the balance to under $50,000 to remove the certification and passport restrictions? 

The short answer from the IRS is no. Just reducing the amount under $50,000 will not decertify the taxpayer. The key is to get into good standing – that is, individuals certified as having seriously delinquent tax debt must either pay the entire balance or set up a payment agreement with the IRS. 

Two quick collection alternatives come to mind. First, the quickest way to remove passport restrictions could be paying the balance to under $50,000 and setting up a streamlined installment agreement for the rest (payment terms up to 72 months).
Second, taxpayers who owe between $50,000 and $100,000 can use the new IRS expedited installment agreement process to quickly get in good standing with the IRS. Taxpayers who owe more than $100,000 can pay the balance down to under that amount to get into this special 84-month payment plan. Otherwise, taxpayers who owe more than $100,000 or need terms longer than 84 months must file detailed collection information statements (Form 433 series) with the IRS and wait for the IRS to approve their installment agreement. This process can take months, which will also mean extended passport restrictions until the IRS approves the agreement and decertifies the taxpayer. 

7. Can taxpayers appeal their seriously delinquent tax debt certification? 

Under Section 7345(e), taxpayers can appeal their status in federal district court or U.S. Tax Court. But the taxpayers’ passports will remain restricted while they appeal.
Expect further legislative and administrative remedies to allow taxpayers to contest their status at the same time they learn about passport restrictions. One reason we should see these additional remedies is the uncertainty of international mail. Many taxpayers may not be receiving IRS letters about their unpaid taxes. In fact, they may first find out about their passport restrictions when they try to travel to another country or return to the United States. A 2015 Treasury Inspector General for Tax Administration study reported that the IRS had no idea whether U.S. taxpayers living abroad had received the 855,000 notices it sent. 

For taxpayers who are surprised by their passport restrictions when they try to travel, the best way to expedite travel is to obtain a quick installment agreement. 

8. What if taxpayers don’t think they owe the tax?

New Transportation Bill, FAST, Adds Some Tax Provisions (12/7/15; 2/27/16)

This blog entry was substantially revised on 2/27/16 to incorporate the revisions I just made to my Federal Tax Procedure text:

XIII. Denial or Revocation of Passport for Seriously Delinquent Tax Debt.. 

Section 7345(a) [here] and 22 U.S.C. § 2714a [here], added in late 2015, require that, upon the IRS certification transmitted to the Secretary of State (through the Secretary of the Treasury) an individual has “a seriously delinquent tax debt,” the Secretary of State “shall not issue a passport” to the individual and, if a passport has already been issued, "may revoke" the individual's passport. n2234   A “seriously delinquent tax debt” is an assessed tax debt greater than $50,000 if a notice of  tax lien has been filed with CDP rights exhausted or lapsed or a levy under § 6331 has been made. n2235  Exceptions are made for debts for debts that are being paid “in a timely manner” pursuant to agreement with the IRS or which are subject to either a CDP hearing or an election for innocent spouse relief under § 6015. n2236 The IRS must “contemporaneously notify an individual of any certification under subsection (a).” n2237 The notice shall include notice of the certification and of the right to bring a civil action in the district court or Tax Court to contest whether the certification was erroneous. n2238  The certification must be reversed if the certification was erroneous, the tax debt is fully satisfied or the tax debt ceases to be a seriously delinquent tax debt as defined. n2239  The required notices of tax liens and notices of levy must include notice of § 6345's authority to deny or revoke passports. n2240 The Secretary of State may approve exceptions to these requirements in “emergency circumstances” or for “humanitarian reasons” n2241 or may limit the passport only for return to the U.S. n2242  Finally, apart from a seriously delinquent tax debt certification, the Secretary of State may deny a passport for failure to provide a valid Social Security Number. n2243.
   n2234 § 7345(a); and 22 U.S.C. § 2714a(e)(1).
   n2235 § 7345(b)(1). Like many of provisions of the Code, the amount is adjusted for inflation.  § 6345(f).
   n2236 § 7345(b)(2).
   n2237 § 7345(d).
   n2238 § 7345(e).
   n2239 § 7345(c)(1) (reversal of certification if error or debt paid or ceases to be a seriously delinquent tax debt) &(e)(2) (judicial determination of erroneous certification); 22 U.S.C. § 2714a(g).
   n2240 FAST Act § 32101(b), amending § 6320(a)(3) and § 6331(d)(4) to add this requirement.
   n2241 22 U.S.C. § 2714a(e)(1)(B) & (f)(1)(B).
   n2242 22 U.S.C. § 2714a(f)(2)(B). n2243 22 U.S.C. § 2714a(f)(1).

Other Provisions of FAST ACT

The other provisions of the bill are important but probably not of much interest to the readers of this blog.  The renewal of outsourcing of debt collection to private debt services is, I think, odd but not unexpected in today's political environment.  Without getting into the details, it seems to apply only to those debts which, from a collection perspective, are delinquent in the collection cycle and thus would require major IRS resources to collect.  For those debts, perhaps, it may make sense to permit some private debt collectors -- acting under proper safeguards spelled out in the statute -- expend their own resources to chase after the debts.  For more comment on the new provision, see Robert M. Wood, IRS Private Debt Collectors Are Now Legal: 10 Things You Should Know (Forbes 12/1/15), here.