Tax Debt, 401(k) Accounts, and Passports Too

Under limited circumstances, the Internal Revenue Service (the “IRS”) may garnish retirement plan benefits. Assets deferred under a Section 401(k) plan of a plan participant are generally unavailable to the participant’s creditors through seizure or garnishment as long as the assets are held in the participant’s 401(k) account; however, assets held in a 401(k) plan account are not exempt from seizure or garnishment from the IRS if the participant owes federal income taxes.

In general, if the plan participant is eligible to receive a distribution from the 401(k) account, the IRS can seize assets to settle the participant’s tax debt. However, if the participant is not eligible to receive a distribution under the plan due to age or other plan restrictions, the IRS may not seize the assets.

The IRS may take additional enforcement actions in certain circumstances to garnish retirement plan benefits. Seriously delinquent tax debt is any unpaid, legally enforceable Federal tax liability of an individual that has been assessed, is greater than $50,000 and to which a notice of lien has been filed. As of January 2018, the debt must be greater than $51,000.

Unless statutory or discretionary excluded, a seriously delinquent tax debt includes, but is not limited to, tax assessments made under an individual taxpayer’s identification number, Social Security number, or EIN, such as U.S. individual income taxes, trust fund recovery penalties, business taxes for which the individual is liable and other civil penalties. This does not include certain other non-tax liabilities.

A court found that Section 7345 of the Internal Revenue Code allows the government to revoke a taxpayer’s passport without violating the constitution. The taxpayer had a “seriously delinquent tax debt” according to the IRS that required the U.S. State Department to deny the taxpayer the right to renew his passport. The taxpayer contended the statute was unconstitutional by infringing on the right to international travel.

The court dismissed the taxpayer’s claims based upon the First Amendment. In reviewing a Fifth Amendment due process claim, the court acknowledged that taxpayers have the constitutional right to international travel, the court did not expand substantive due process by recognizing a new fundamental right of international travel. The court concluded that the collection of seriously delinquent tax debt was a legitimate government interest.