Seizing Passports – Yet Another IRS Remedy

Take-Away: The federal government’s ability to seize a passport for the failure to report a foreign bank account was recently upheld by a Federal Appeals Court.

Background: The federal Fixing America’s Surface Transportation Act (also known as the FAST Act) gave to the IRS the ability to provide a certification to the Department of State to seize the passport of a citizen who is seriously delinquent in tax debt. [26 U.S.C. 7345.] In short, the FAST Act uses a passport revocation scheme to address the failure to report foreign bank accounts, serious tax arrearages and penalties that linger without payment. The constitutionality of this draconian remedy was recently the subject of a federal court.

Franklin v. United States, Fifth Circuit Court of Appeals, No. 21-111-4, September 15, 2022

Facts: Mr. Franklin failed to file accurate income tax returns and had not reported a foreign trust of which he was the beneficial owner. Accordingly, the IRS assessed penalties against him that totaled $421,766 in 2018. In 2018 the IRS started collection proceedings against Mr. Franklin, filing a tax lien against his Social Security benefits. In addition, the IRS certified to the Department of State that Mr. Franklin had a ‘seriously delinquent tax debt [26 USC 7345) which led to the State Department revoking Mr. Franklin’s passport. Mr. Franklin then filed a lawsuit against the government citing several technical arguments, including his claim that the seizure of his passport was a violation of his right of travel under the Fifth Amendment.

District Court: The District Court judge dismissed all of Mr. Franklin’s claims. With regard to the constitutional claim, the judge found that the revocation of passport remedy was constitutional under a rational-basis review.

Appeals Court: Addressing Mr. Franklin’s challenge to the constitutionality of the FAST Act’s passport revocation scheme, the Court acknowledged that the claim was based upon Mr. Franklin’s substantive due process rights under the Fifth Amendment, which protects individual liberty against certain governmental actions regardless of the fairness of the procedures used to implement them. However, if a right is not a fundamental right, then a rational review is applied, and the restriction, such as the revocation of a passport, survives as long as it is rationally related to a legitimate government interest.” The Court thus narrowed the challenge to the right to international travel. The Court found the passport revocation scheme to be constitutional, noting:

• “We cannot find that it [international travel] is a fundamental right such that restrictions on it merit strict scrutiny…. Just as interstate travel can sometimes be abridged to protect the safety and welfare of the area or Nation as a whole, so it is with international travel.”

• “The passport-revocation scheme is also clearly connected to that goal: delinquent taxpayers will be well-incentivized to pay the government what is owned to secure return of their passports, and those same taxpayers will find it much more difficult to squirrel away assets in other countries if they are effectively not allowed to legally leave the country.”

• “Congress was within its rights to provide the IRS another arrow in its quiver to support its efforts to recoup seriously delinquent tax debts. And importantly, what Congress provided was an arrow, not a bazooka. Its chosen tool is carefully aimed at the problem, not fired indiscriminately with grave risk of collateral damage to the rights of those not covered by the scheme.”

Conclusion: Over the years we have addressed the legal risks associated with the failure to report foreign bank accounts. Clients who play the ‘audit lottery game’ should be reminded no only of the penalties associated with the failure to file the required account disclosure forms, they should also be reminded that their U.S. passports may also be at risk as well.