In Franklin v. U.S.,1 the Fifth Circuit recently upheld the constitutionality of Code §7345, a provision of the Code that was in 2015. It allows the I.R.S. to effect the revocation of a U.S. citizen's passport where the individual is in seriously delinquent tax debt.

I.R.S. Procedure

The threshold for seriously delinquent tax debt is $50,000, with adjustments for inflation. Debt includes unpaid tax liability, penalties, and interest from late payments. Certain debts, such as debt of a bankrupt taxpayer, are excluded from this definition.

When the I.R.S. determines that a person is in seriously delinquent debt, it issues a CP508C Notice to the taxpayer, with a copy to the Secretary of State. This prevents the State Department from issuing or renewing a passport to the taxpayer, although the taxpayer's passport is not automatically revoked. Before denying a new or renewed passport, the State Department will give a taxpayer 90 days to sort out the situation.

Revocation may occur if the I.R.S. goes further and recommends revocation to the State Department. Before making such a recommendation, the I.R.S. will issue a Letter 6152, (Notice of Intent to Request U.S. Department of State Revoke Your Passport), to the taxpayer, informing him or her of the possible revocation. The letter requests that the taxpayer call the I.R.S. within 30 days to resolve the situation. Recommendations of revocation are typically reserved for taxpayers who promised to pay or could have paid off the debt but did not.

Avenues of Relief

Several avenues of relief are available to such taxpayers:

  • The I.R.S. may not submit a certification to the State Department if the relevant debt is the subject of a requested or pending collection due process hearing.
  • The individual and the I.R.S. may enter into an installment agreement allowing for the payment of the debt over time.
  • The I.R.S. may accept an offer in compromise proposed by the taxpayer for the satisfaction of the debt at a lower amount.
  • The U.S. Department of Justice may enter into a settlement agreement to satisfy the debt.
  • Collection against a married couple filing a joint tax return may be suspended as to one of the spouses claiming innocent spouse relief under Code § 6015.
  • The application of Code §7345 to the taxpayer is the subject of an ongoing challenge in U.S. District Court or the Tax Court.

Franklin involved a court challenge to the application of Code §7345 after an offer in compromise was denied.

The Case

James Franklin is a U.S. citizen who failed to report a foreign trust of which he was the beneficial owner. When the I.R.S. discovered his failure in compliance, it levied penalties in the amount of $421,766. Two years later, it began taking steps to collect those penalties.

One of the steps was to issue a certification to the State Department that the taxpayer was in seriously delinquent tax debt. Mr. Franklin, believing the I.R.S.'s assessment was procedurally improper due to lack of proper supervision within the I.R.S. of the person asserting the penalty, offered to pay the agency a compromise sum. The I.R.S. declined, and the taxpayer brought suit.

Mr. Franklin asserted two reasons in support of his request for relief. The first was that procedural deficiencies invalidated the I.R.S.'s assessment. This claim was dismissed for lack of jurisdiction by both the U.S. Federal District Court and the Fifth Circuit Court of Appeals. The Anti-Injunction Act prevents a court from having jurisdiction to prevent the I.R.S. from collecting tax except as provided by statute.2

The second assertion challenged the constitutionality of the statute that resulted in a violation of substantive due process. Once that issue was raised, the court was required to determine the proper level of scrutiny for evaluating the claim. The standards are strict-scrutiny, intermediate scrutiny, or rational basis scrutiny.

The court first considered whether the strict-scrutiny standard applied. This standard is reserved for situations involving fundamental rights. This standard imposes an obligation on the government to show that the law is narrowly tailored to serve a compelling state interest. The court determined that strict scrutiny was inappropriate in a matter covered by Code §7345.

While early Supreme Court cases suggested that international travel might be a fundamental right,3 later cases distinguished international travel from interstate travel.4 The latter was a fundamental right, while the former was only an extension of the general right to liberty. The strict-scrutiny standard was not applicable.

Next, the court applied an intermediate level of scrutiny. Intermediate scrutiny requires that the challenged restriction must serve important governmental objectives and must be substantially related to achievement of those objectives. Collecting taxes is an important government objective and denying passport privileges is related to that objective in two ways. First, it incentivizes paying the debt. Second, it makes it difficult for delinquent taxpayers to hide assets in foreign countries. The court also approved of the law's scope. The statute targeted serious debts, included several procedural safeguards, and allowed erroneously affected taxpayers an opportunity to seek relief in court. Congress properly fashioned an arrow, not a bazooka, for the I.R.S. to use.

Note that the court reserved on determining that the intermediate standard of review applied to the case. It could have held that the rational standard of review applied,5 but whichever standard was applicable the decision would be the same – no fundamental right exists under the Constitution regarding international travel.

The Fifth Circuit's decision followed the Tenth Circuit's validation of Code §7345 last year.6 Click here to continue reading . . .

Footnotes

1. No. 21-11104, 2022 BL 326674.

2. 26 U.S.C. § 7421(a).

3. Zemel v. Rusk, 381 U.S. 1 (1965); Aptheker v. Secretary of State, 378 U.S. 500 (1964); Shelton v. Tucker, 364 U.S. 479, 488 (1960).

4. Califano v. Aznavorian, 439 U.S. 170 (1978); Haig v. Agee, 453 U.S. 280 (1981); Regan v. Wald, 468 U.S. 222 (1984).

5. The rational-basis standard is the lowest of the three standards that must be met by the government when it defends the constitutionality of a statute. The challenge to the statute fails once the government demonstrates that the law is rationally related to a legitimate government interest.

6. Maehr v. U.S. Dept. of State, 5 F.4th 1100 (10th Cir. 2021).

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