In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses a recent court case where a person who was delinquent on his taxes had his passport revoked!
Don’t Pay Tax? You can Lose your Passport!
Hey everyone, Adam Bergman here, tax attorney, founder of IRA Financial. On today’s Adam Talks, gonna talk about a recent case, 5th Circuit Court of Appeals case called Franklin v. United States, where Mr. Franklin, because of a tax debt of $421,000 or so, lost his passport. Crazy case, and as a tax lawyer, I was not aware that Section 7345 of the code existed; that if you have a tax delinquency of $55,000, it’s $50,000 in the Code, but adjusted for inflation, $55,000, the IRS could ask the Department of State to basically revoke your passport. Yeah, basically force you into staying in this country. So, I thought I would chat about this case. The case came out a couple of weeks ago, September 15, 2022, and it was kind of mind blowing when I read it because, again, I just wasn’t aware that for such a low tax debt, right, $55,000 is not billions of dollars, the IRS actually have the ability to go to the Department of State and get someone’s passport revoked because it’s not an inherent right. Believe it or not, the ability to international travel, according to the courts, is not an inherent right, and what the courts believe is that the IRS’s ability and their responsibility to collect taxes is more important; it outweighs our individual rights to international travel.
So, here we go. So, this was kind of a shocking case that I thought I would, you know, bring to your attention. I kind of chatted with some colleagues and friends, some lawyers, some not, about this case, and they were all blown away; say what? What? The IRS can ask the Department of State to revoke someone’s passport because they owe $55,000 in taxes? That seems a little bit much. But in this case, I guess the IRS felt that Mr. Franklin was a flight risk in some way. I mean, he had some foreign trusts and he failed to file accurate tax returns or report a foreign trust.
So, what happened is the IRS filed a notice – federal tax lien and levied his Social Security benefits in an effort to collect the unpaid tax. In addition, the IRS certified the debt as seriously delinquent to the Department of State pursuant to 7345. The State Department then revoked his passport. The taxpayer brought various claims regarding the IRS’s assessment and challenged the constitutionality of Section 7345 in the District Court. The court dismissed all the taxpayer’s assessment claims for lack of jurisdiction and held Section 7345 passes constitutional muster, applying the rational basis standard review.
So, it’s another example of you don’t have much luck suing the government, especially the IRS. If there’s one branch of government that has essentially unfettered powers, it’s the IRS. Why? It goes back to the belief that the IRS needs to be able to collect taxes because without tax revenue, the government is not going to be able to operate. So, when you weigh that versus individual rights, international travel, individual rights are going to be on the short end of that argument each time. So, there is a bit to digest here. Again, it’s a $55,000 number, it’s not $5 million. So, it’s quite low, when you think about tax and penalties, even if you have a $15-$20,000 tax owed and you just don’t know about it, right? After a couple of years, with tax and penalties, that can be around $55,000. So, the IRS doesn’t have to certify and request the Department of State to revoke someone’s passport. It’s not done super often, but it’s done as part of my research.
The difference here is people don’t fight it, right? This guy Franklin was obviously super annoyed and upset, and he decided to fight it on constitutional grounds, which is a very, very tough argument to make and be successful, especially the 7345 in the tax code. So, be very, very hard for courts to have jurisdiction over it; and they could, I guess, but the general consensus is that the ability to collect taxes outweighs our individual rights.
So, here are some debts they can’t revoke your passport on. Okay, so this is from the IRS, so some tax debt isn’t included in seriously delinquent tax debt such as FBAR and child support, okay? Being paid timely with the IRS-approved installment agreement. So, if you have an installment agreement, you can get away, you still owe the tax, they can’t take your passport. If you have an offer in compromise. If there’s a collection due-process hearing. If you’re bankrupt. If you’re identified as a victim of identity theft. If your account the IRS has determined is correctly not collectible due to hardship; who’s located within a federally declared disaster area. If you request pending with the IRS installment agreement; you have a pending offer of compromise where the IRS has accepted an adjustment. So, those are the conditions where you can get around not having your passport revoked.
But all others is fair game to the IRS, and all they need to do is certify it and have the Department of State act upon that certification, which they’ll do. So, it’s interesting, why is tax debt more important than student debt or other debt? But we all know why, it’s the IRS. And the IRS is probably the most important agency of the government because it actually generates revenue for the government. Like Department of Defense, Secretary of State, Department of State, Homeland Security – they don’t generate a lot of revenue for the government. The IRS does. The revenue generated by the IRS is core to the operations of our government. So, there’s $5.8 billion in delinquent taxes; that’s estimated. So, the IRS needs to be in power. We saw that with the Biden administration providing $80 billion in essential funding over the next ten years. 75-80,000 new agents or so. This is important, and it’s a revenue generating department, which makes it even more important.
So, bottom line is, if you owe more than $55,000, guess what? You may not be able to go to Paris next year, or London, or to the Bahamas. You may be grounded in the United States, and they may seize your Social Security or other forms of payment, including retirement accounts. Retirement accounts are subject to seizure. They’re protected from creditors, but not the IRS. So, work with a tax professional.
Everyone should have a good accountant, okay? Even if you make $50,000 W-2, it’s worth paying a few hundred bucks for an accountant. You can go to an agency like H & R Block and have some professionals look it over. But again, depending on your financial position, there’s a lot of really good small accounting firms; they’re not going to charge you tens of thousands of dollars a year. You may only pay $7-800 a year, but you’ll have someone review your tax return. There’s potential deductions that you’re missing out, right? So, they will probably help you save money. There may be credits you’re not applying for or other deductions you’re not aware of. Plus they’ll review your return and make sure you’re filing in a timely matter. They’ll send you notifications when things are due, they’ll help you do estimated taxes, things like that.
It’s worth it because, look, if you do not pay, you fail to file; those failure to file penalties are huge. They add up super quick. And even if you don’t owe tax, the fact that you did not file a tax return, like a 1065, a partnership return, even when no tax is due, or like a 5500-EZ, you can have hundreds and thousands of dollars in penalties and interest over a year or two years and technically the IRS could certify, and also grab your passport and revoke it until you pay. So, some people not going to care, right? I’m not going to Europe, not going to Bahamas. I love this country. I don’t need to go anywhere, and they can have my passport, I don’t really care. But, I am a believer; your passport is you ticket out. I was born in Canada, I still have a Canadian passport, okay? I’m going to keep it. And I still love America. It’s the greatest country in the world. But hey, if you’re going to give me a passport from another country that’s a democratic-free nation, I’ll take it. Because you never know what can happen, right? No one knows what can happen.
See what’s going on in Russia? Who would have thought they’d have a nationwide mobilization draft, right? So things can change; governments change. Passports are important. It gives you freedom to move around. And the fact that the IRS could just take that because you owe $55,000 in taxes, I thought was worth discussing on this podcast. I was shocked. I understood if it was a million dollars or something totally out there, or if you have strong foreign connections where there’s a real risk of flight. But for owing a $400,000 or so to revoke this guy’s passport seems pretty egregious, pretty aggressive, but yeah, it’s hard to know every detail of the case. There’s obviously personalities involved. I don’t know what transpired between the agents and Mr. Franklin, but for them to go this far, for him to fight it, there’s probably some bad blood between these parties.
But either way, pay your taxes, file on time because a lot of times it’s the interest and the penalties for late filing or failure to file or late payments that really add up, and as I mentioned, you may owe $40-$50 grand, but because of the penalties and interest, you may owe now $90,000 or $100,000. And no one wants to be in a situation where the IRS is going to revoke your passport. So, is it fair? Of course not. It’s definitely not fair, right? Why is IRS debt more important than student debt or other types of private debt? But, bottom line is we don’t live in a fair system. IRS has ultimate control because they are the revenue generating body for the government, and they need to be empowered to collect revenue so the folks in DC and all the bureaucrats in Washington could do their job, and the government has what it needs to fund important stuff like the military or public school or infrastructure. That’s stuff’s important; we can all agree on. We want a strong military. Our soldiers should be paid well. They should have proper modern equipment. So, money is important. We may not necessarily care that our congressmen get bumps in salary, but we do care about military. We should have better infrastructure, better roads, better rail systems, better airports. So, we need money for that. So, I got it, I got it. But $55,000 to revoke someone’s passport? Not to say the IRS does it every time, they don’t, but they have that in their pocket, and they could use it anytime they wish to scare people to pay, which is their job.
So, anyway, I hope you guys enjoyed today’s podcast. I didn’t mean to scare anyone. I just, I was just shocked when I learned about this case. I went back to the taxpayer rule and reviewed 7345, and I was like, Whoa. Again, some people think tax lawyers know every section of the code, you can’t. There’s thousands of thousands of provisions and for example, in the IRA world, section 4975, section 408, those are the two main provisions. Those are just two sections out of thousands and thousands of sections. Most good tax lawyers will specialize in less than probably 30 sections in the code, right? If you’re an S Corp lawyer, there’s only a handful of sections. If you’re a partnership attorney, you may only be dealing with 701 to 754, right? Like, there may be 30, 40 provisions you’re worried, you’ll work on. Same with if you do mergers or reorgs or spin offs, you may only be dealing with section 300s, right? Maybe 50, 60 sections in the 300 area. So, just because you’re a tax lawyer doesn’t mean you know every provision code. I wasn’t aware of 7345. I had no idea the IRS could revoke or ask Department of State to revoke your passport for a measly $55,000 in debt. But hey, that’s reality. So again, pay up timely; even if you don’t think you owe tax, you may, so work with a tax professional so you can make sure you’re not in the same position as Mr. Franklin, who owes now $400,000 and doesn’t have a passport and getting his Social Security seized. You don’t want to be there. It’s ugly. I’ve seen it with clients and friends. The IRS will win every time; you’re not going to beat them, even if you think they’re acting improperly. You will lose, okay? Doesn’t matter how much money you have. The courts will always protect the IRS over you. Just a fact. So, settle up, you move on. Don’t try to fight the IRS. You’re going to lose. Not worth it. Throw out your personal beliefs, your emotions. This is a pretty uphill battle and you’re going to lose it. So, pay your taxes! You can work with a tax professional who can help you minimize, but you need to file on time and pay what you owe and don’t want to play around with the IRS. And they have the power to seize retirement accounts, Social Security and lock you down and steal your passport or at least revoke it until you pay.
So, be careful, but hope you guys enjoy the podcast. Don’t do anything wrong. You have nothing to worry about. But hey, my job is to kind of help educate you and talk about current events involving taxes, self-directed retirement accounts, investments, and this Franklin case just dropped a couple of weeks ago, mid-September 2022, so I thought it was important to share.
So, thanks for watching. It’s a weekly podcast drops every Wednesday. You can pick it up anywhere you listen to podcasts. You can also watch it on YouTube if you enjoy our YouTube channel at IRA Financial; which is a great channel. We drop three podcasts three to four videos a week and a YouTube live that generally is Wednesday, twelve Eastern every week. So, subscribe because there are weeks when I will go live at different times, depending on what’s going on during the week. So, take care, be well and talk to everyone again next week.