Fifth Circuit upholds constitutionality of passport revocation

by | Sep 21, 2022

TAX ALERT | September 21, 2022

Executive summary

Taxpayers can lose their U.S. passports over seriously delinquent tax debts. The Fifth Circuit Court of Appeals joins the Tenth Circuit to uphold the constitutionality of section 7345, the passport-revocation scheme. As a result, the IRS is charging ahead with section 7345 as a collection tool.

In Franklin v. United States, the Fifth Circuit Court of Appeals upheld the constitutionality of section 7345, Revocation or denial of passport in case of certain tax delinquencies. The Fifth Circuit concluded that section 7345 does not violate the Fifth Amendment’s due process clause.

The IRS assessed the taxpayer in Franklin $421,766 of additional tax and penalties. He failed to file accurate tax returns and report a foreign trust. The IRS filed a notice of federal tax lien (NFTL) and levied his Social Security benefits in an effort to collect the unpaid debt. In addition, the IRS certified the debt as seriously delinquent to the Department of State pursuant to section 7345. The State Department revoked his passport. The taxpayer brought various claims regarding the IRS assessment and challenged the constitutionality of section 7345 in district court.   The court dismissed all of the taxpayer’s assessment claims for lack of jurisdiction and held that section 7345 passes constitutional muster, applying the rational basis standard of review.

Congress added section 7345 to the internal revenue code late in 2015 as part of the Fixing America’s Surface Transportation (FAST) Act.  It provides that if the Commissioner of the IRS determines that an individual has a seriously delinquent tax debt and “certifies” such debt to the Secretary [of the Treasury], then the Secretary will transmit that certification to the Secretary of State, who will then deny, revoke, or limit the U.S passport of that individual (section7345(a)).  The decision to deny, revoke, or limit a U.S. passport lies solely with the U.S. Department of State. A seriously delinquent tax debt means an unpaid federal tax liability that is (1) assessed, (2) exceeds $50,000 (adjusted for inflation, which for year 2022 is $55,000 pursuant to Rev. Proc. 2021-45, section .59), and (3) the IRS filed an NFTL or  levied with respect to the debt, and collection due process (CDP) rights have been exhausted or lapsed ( section 7345(b)(1)). 

The Fifth Circuit Court of Appeals affirmed the district court’s decision. Following the Supreme Court’s reasoning in Califano v. Aznavorian, 439 U.S. 170 (1978), and Haig v. Agee, 453 U.S. 280 (1981), the Court of Appeals concluded that the right to international travel is not a fundamental right affording strict scrutiny standard of review. The court further concluded that the government’s interest in collecting taxes is so important that it survives even an intermediate scrutiny test. Under intermediate scrutiny, a restriction is upheld if it serves an important governmental objective and is substantially related to those objectives

The Court in Franklin reasoned that the Government has an important interest in recouping the $5.8 billion in delinquent taxes, and the passport revocation procedure will encourage taxpayers to pay their tax debts. According to the court, the practice will make it difficult for taxpayers to hide assets in other countries when they are not allowed to leave the country. The Court observed that section 7345 is limited and does not authorize the Government to seize the passport of any taxpayers who owe taxes, but rather, it is only applicable to taxpayers with tax debts of more than $50,000. The Court characterized this provision as Congress providing the IRS “an arrow, not a bazooka” to combat seriously delinquent tax debts.

The Fifth Circuit joins the Tenth Circuit in upholding the constitutionality of section 7345. In Maeher. v. U.S. Department of State, the Tenth Circuit also affirmed a lower court’s determination that section 7345 does not violate substantive due process. 

Questions or Want to Talk?

Call us directly at 972.221.2500 (Flower Mound) or 940.591.9300 (Denton),
or complete the form below and we’ll contact you to discuss your specific situation.


This article was written by Evan Stone, Truong Do and originally appeared on 2022-09-21.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2022/fifth-circuit-uphold-constitutionality-of-passport-revocation.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

 

RSM

KHA Accountants, PLLC is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KHA Accountants can assist you, please call 972.221.2500.

Five Steps to Recognizing Revenue in Financials

The FASB and IASB have provided standards for properly recognizing revenue in your financials. Using a five step process, companies recognize revenue based on the value and timing of when control of the goods and services are transferred to the customer. Learn about the standards and how to properly recognize revenue for your company.

Is your managed service provider as secure as you think?

As attack methods become more sophisticated and widespread, no organization is immune to suffering a cybersecurity breach. The key to protecting your business is developing controls to make you less of a target and limit potential damage, as well as implementing a comprehensive strategy to react if you fall victim to an attack.