Opinions and Legal Insights

IRS Reversal of ‘Seriously Delinquent Tax Debt’ Certification Renders Case Moot in Tax Court

Under Internal Revenue Code (IRC) §7345, the Secretary of State is authorized to deny, revoke, or limit a taxpayer’s passport if the Internal Revenue Service (IRS) certifies to the Secretary of State that the taxpayer has a “seriously delinquent tax debt.” Although a taxpayer in receipt of certification notice (Notice CP508C) has no right to an administrative appeal, the taxpayer may file suit in a district court or the Tax Court to determine the certification’s validity.1

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On June 25, 2020, the Tax Court held that where the IRS reverses certification after a taxpayer petitions the Tax Court for review of both the certification and the underlying tax liability (which was concurrently pending review in an IRC §6330 hearing):  (1) the Tax Court lacks jurisdiction to decide a taxpayer’s underlying liability for IRC §6038 penalties; (2) the Tax Court’s jurisdiction is narrowly confined to determining whether the IRS certification of a taxpayer (or the IRS’s failure to reverse a certification) was erroneous; and (3) the case is moot, because the Tax Court cannot offer any additional relief.2 As such, assuming the taxpayer had no prior opportunity to dispute the underlying liability, the taxpayer must pursue such challenge with the CDP officer.

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Background

In February of 2018, the IRS assessed $160,000 in penalties against Taxpayer for failing to file information returns regarding foreign corporations for tax years 2005-2010.3 Shortly thereafter, the IRS issued Taxpayer a notice of its intent to levy on a State income tax refund.4 Taxpayer timely submitted an appeal under the IRS Collection Appeals Program—commonly referred to as a CAP appeal. However, due to a coding error in the IRS’s computer system, the CAP appeal was misclassified as a request for a Collection Due Process (CDP) hearing.

In September of 2018, the IRS filed a Notice of Federal Tax Lien (NFTL) with respect to Taxpayer’s unpaid penalties, and on September 20, 2018 the IRS sent out a Notice of Federal Tax Lien Filing and Your Right to a Hearing (i.e., an NFTL providing the Taxpayer’s right to request a CDP hearing). Taxpayer timely submitted a CDP hearing request; however, the IRS “did not properly record [Taxpayer’s] hearing request and did not immediately afford her a CDP hearing.”5

In December of 2018, Taxpayer received a Notice CP508C, Notice of Certification of Your Seriously Delinquent Federal Tax Debt. Specifically, the CP508C notified Taxpayer that the IRS had completed the process of certifying to the State Department that she owed “seriously delinquent tax debt.”

Taxpayer challenged the correctness of this certification, in addition to the underlying liability for the penalties in the Tax Court on April 8, 2019.

Just over one month later, the IRS, “relying on its erroneous coding of [Taxpayer’s] CAP appeal as a CDP hearing request,” reversed its certification of Taxpayer’s tax debt as “seriously delinquent.”6 Remarkably, a week later, “the IRS discovered its coding error,” re-certified Taxpayer as a person owing seriously delinquent tax debt, and re-issued notice of such to Taxpayer.

Thereafter, on May 24, 2019, the IRS filed a motion to dismiss “for lack of jurisdiction insofar as [Taxpayer] seeks to challenge in this case her underlying liability for the penalties.”7 Specifically, the IRS represented that it was investigating, (1) whether it actually received Taxpayer’s CDP hearing request, and (2) that if it had received such request, then it would reverse the certification accordingly and move to dismiss for mootness.

On September 26, 2019, the IRS filed a motion to dismiss on grounds of mootness. First, the IRS clarified that it had determined Taxpayer’s CDP hearing request was timely and received.  Next, the IRS confirmed that Taxpayer had accordingly been offered a CDP hearing wherein her underlying liability claims were pending review. Furthermore, since the matter was pending review, the IRS had reversed the second certification with the State Department. According to the IRS’s motion, the case was moot, because the Tax Court could offer no further relief.

Taxpayer opposed the IRS’s motions, maintaining that her “underlying liability claims may properly be considered in this passport proceeding and that the reversal of the certification does not moot her case.8

Applicable Law and Analysis

Ultimately, although acknowledging an IRS “track record” demonstrating obvious deficiencies in its computerized coding systems, the Tax Court agreed with the IRS that it lacked jurisdiction over deciding Taxpayer’s underlying liability for the penalties. Additionally, since Taxpayer’s certification was reversed, the Tax Court lacked authority to provide further relief—making Taxpayer’s case moot.

1. IRC §7345: Seriously Delinquent Tax Debt

In reaching its decision here, the Tax Court first considered that IRC §7345(a) provides that when the IRS certifies a taxpayer as having “a seriously delinquent tax debt,” that certification “shall be transmitted ‘to the Secretary of State for action  with respect to denial, revocation, or limitation of the taxpayer’s passport.’”9

The Tax Court further explained that a “seriously delinquent tax debt” is defined as an unpaid, legally enforceable individual’s Federal tax liability exceeding $50,000 (adjusted for inflation), which has been assessed and for which a lien notice has been filed or a levy has been made.10

Significantly, the Tax Court stated that a “seriously delinquent tax debt” does not include a debt where collection is suspended because an IRC §6330 CDP hearing is requested or pending. Moreover, noted the Tax Court, per IRC §7345(c)(1), the IRS must reverse its certification if the certification was erroneous.11

Finally, the Tax Court stated that under IRC §7345(e)(1), certified taxpayers may petition the Tax Court to determine whether the certification was erroneous or whether the IRS has failed to reverse the certification. Importantly, the Tax Court emphasized that the only form of relief it is able to grant a taxpayer is that provided by IRC §7345(e)(2), which states:

If the court determines that such certification was erroneous, then the court may order the Secretary to notify the Secretary of State that such certification was erroneous.”

Thus, the Tax Court concluded that, in any case, it was unable to offer Taxpayer any other form of relief, including a redetermination of Taxpayer’s underlying liability for the penalties the IRS has assessed.

2. Jurisdiction

Next, the Tax Court proceeded to discuss the scope of its jurisdiction over “passport cases.”

As the Tax Court explained, IRC §7345(e)(1) provides that the only determination that the Tax Court is permitted to make in passport cases is whether the IRS’s certification of a taxpayer (or the IRS’s failure to reverse a certification) was erroneous.

According to the Tax Court:

There is nothing in the text of section 7345 that authorizes us to redetermine petitioner’s underlying liability for the penalties the IRS has assessed. Where Congress has authorized us to consider a taxpayer’s underlying liability for an assessed tax when reviewing IRS administrative action in other contexts–for example, in CDP cases–Congress has made this clear in the statute’s text. See sec. 6330(c)(2)(B) (authorizing review of “challenges to the existence or amount of the underlying tax liability” in specified circumstances). Congress included no such authorization in section 7345.12

As such, the Tax Court stated that:

[N]either section 7345 nor any other Code provision grants us jurisdiction to consider, at this time and in this case, [Taxpayer’s] contention that the section 6038 penalties were “illegally assessed.”13

3. Mootness

Finally, the Tax Court reiterated that Taxpayer properly invoked its jurisdiction when she requested a determination of whether the IRS certification was erroneous. However, the Tax Court agreed with the holding in Conservation Force, Inc. v. Jewell, which maintained that a case is moot once “the court can provide no effective remedy because a party has already ‘obtained all the relief that [it has] sought.’”14

In this case, noted the Tax Court, the IRS had already conceded that the certification was erroneous and reversed the certification. As such, the Tax Court maintained that the case was moot, because it could offer no further relief for Taxpayer’s passport claims.

Conclusion

Taxpayers and tax professionals dealing with circumstances similar to those discussed above should remember that they won’t find a strategic opening to challenge underlying liabilities in the Tax Court in this manner. Rather, in circumstances like those in Ruesch v. Commissioner, an IRS reversal of a “seriously delinquent tax debt” certification will promptly render the case moot with the Tax Court, leaving the matter in the hands of the CDP officer.

If your passport has been certified by the IRS for “seriously delinquent tax debt” then, contact Eli Noff and the Frost Law team at 410-497-5947 or fill out our online form.

Footnotes

  1. IRC §7345(e)(1).
  2. Ruesch v. Commissioner, 154 T.C. No. 13 (June 25, 2020).
  3. Note that theses penalties were assessed under IRC §6038.
  4. More specifically, the IRS issued a Notice CP504, “Notice of Intent to Seize (Levy) Your Property or Rights to Property.”
  5. Ruesch, at 5.
  6. Id. at 6.
  7. Id. at 1.
  8. Id.at 8.
  9. Id. at 8-9, citing IRC §7345(a).
  10. IRC §7345(b)(1), §7345(f).
  11. See also IRM 5.1.12.27.8 (12-20-17).
  12. Ruesch, at 12-13.
  13. Id. at 14.
  14. Id. at 17.

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