Transportation Funding Bill Contains Tax Collection Provisions

On December 4, President Obama signed into law the Fixing America’s Surface Transportation (FAST) Act. While the main purpose of the legislation is to provide funding through 2020 for highways and other transportation projects, the bill also contains several new provisions designed to recover unpaid taxes, including requirements that the Internal Revenue Service (IRS) use private debt collection agencies and that the U.S. State Department refrain from issuing or renewing passports for certain taxpayers with outstanding tax debts in excess of $50,000.

The $305-billion FAST Act provides five years of funding for highways and other surface transportation infrastructure, and is paid for primarily by the Federal gas tax, which is left unchanged at the 18.4-cent-per-gallon level set in 1993. As the projected revenues from the gas tax are insufficient to cover the infrastructure spending in the FAST Act, the tax collection provisions and additional offsets from other parts of the Federal budget were attached to the legislation.

The FAST Act adds a new section 7345 to the Internal Revenue Code, “Revocation or Denial of Passport in Case of Certain Tax Delinquencies,” which authorizes the Secretary of the Treasury to certify to the Secretary of State that a taxpayer has a “seriously delinquent tax debt” based on information provided by the Commissioner of Internal Revenue. This information can then be used by the Secretary of State to deny a passport application by the taxpayer, or to revoke a passport that has already issued. While the State Department is generally prohibited from issuing a passport in such a case, exceptions can be made in humanitarian or emergency situations.

Under the new legislation, a seriously delinquent tax debt is defined as “an unpaid, legally enforceable Federal tax liability” in excess of $50,000 for which the taxpayer has already been notified by the Internal Revenue Service (IRS) of his or her collection due process (CDP) rights, or for which liens, levies, or final notices of liens or levies have been issued by the IRS. The $50,000 limit will be adjusted annually for inflation and cost of living, but is a cumulative amount, and not a per year limit. Exceptions apply if the tax debt is subject to an offer-in-compromise (OIC) or the balance is being paid through an installment agreement; or if collection action has been suspended because the taxpayer has requested a collection due process (CDP) hearing or has filed for innocent spouse relief. Thus, in practice this provision should affect only those taxpayers who have been issued notices by the IRS and have ignored their tax debts.

The possible loss of a passport will also be added to the list of matters that must be included in the notices the IRS sends to taxpayers to inform them of potential collection activities under Section 6320 or 6331, and the IRS will be required to notify the taxpayer when it sends a certification of serious delinquency to the Treasury Department. The legislation also includes a process through which individuals who no longer have a seriously delinquent tax debt can be decertified, and through which the IRS can correct erroneous certifications. Taxpayers may also be eligible for decertification if they pay their seriously delinquent tax debt in full, file for innocent spouse relief, or have an installment agreement or an offer-in-compromise accepted by the IRS.

The Government Accountability Office (GAO) had suggested implementing this measure in 2012, when it reported on the possibility of limiting or denying the issuance of passports to applicants with delinquent Federal tax debts. The GAO noted that Federal law permits the Secretary of State to deny or revoke the issuance of passports in certain circumstances, such as for delinquent child support obligations. The GAO argued that legislation applied to Federal tax debts could generate substantial collections of known unpaid Federal taxes and increase tax compliance for millions of Americans who hold passports.

Also under the FAST Act, Section 6306 is amended to require the IRS to enter into tax collection contracts with third parties for the collection of certain outstanding inactive tax receivables. The legislation defines inactive tax receivables as any tax receivable that has been removed from the IRS’s active inventory due to lack of resources or inability to find the taxpayer; for which more than one-third of the applicable limitation period has passed and no IRS employee has been assigned to collect the receivable; or that has been assigned for collection, but more than 365 days have passed without interaction with the taxpayer for purposes of furthering collection of the receivable.

However, tax receivables relating to pending or active offers in compromise or installment agreements, or that are under examination, litigation, levy, or criminal investigation, are not eligible for collection under qualified tax collection contracts. Other exceptions also apply, including for innocent spouses, deceased taxpayers, minors, taxpayers in designated combat zones, and victims of tax-related identity theft.