IRS Notice of Tax Lien Abuses
After a tax has been assessed by the IRS and a demand for
payment has been made upon the taxpayer, a lien arises in favor
of the United States upon all real and personal property of the
delinquent taxpayer[1] (the “statutory lien”). The statutory
lien includes not only property held by the taxpayer at the time
of assessment, but also all after-acquired property[2]. The
statutory lien continues until the liability for the amount
assessed is satisfied or becomes unenforceable from the
expiration of the statute of limitations.[3] However, a
statutory lien is not valid against any potential mortgagee,
pledgee, purchaser, or judgment creditor until a notice of lien
has been filed by the Secretary or his delegate in the public
records[4] to perfect the surviving statutory lien.
The IRS must elect to file a Notice of Lien. The IRS has the
discretionary authority to perfect the statutory lien by filing
the tax lien in the public records; it is not a mandatory filing
requirement. With that discretionary authority, Congress has (in
effect) instructed the IRS to weigh the advantages for the IRS
and the disadvantages to a taxpayer before filing a Notice of
Lien in the public records.
A tax lien in the public records has very serious and
devastating consequences. After the Notice has been filed,
individual and business taxpayers will immediately be encumbered
with bad credit that is likely to be a stain on their credit
report for approximately ten years.
After the credit agencies and lending institutions note the
Notice of Lien, individuals will have difficulty getting a
credit card, buying a home, renting an apartment, buying a car,
and other items to provide for their reasonable and necessary
living expenses. The few taxpayers able to get credit through
other resources will still have to pay higher credit rates than
the normal rates. In some industries, an IRS tax lien will cause
the loss of a job or a business relationship (e.g. those who
work in the defense industry, the banking industry, the
securities industry and the insurance industry which all require
high qualification standards to maintain employment status). The
credit agencies normally sustain data on the tax lien for ten
years; a very long time to deny access to credit when the
taxpayer needs a home or a new car.
Individuals may suffer a temporary job loss; there may be an
illness in the family; or some other emergencies that prevent
them from being current on their taxes. When the emergency is
over, taxpayers have the potential to regain their ability to
pay their tax debt in full. After the personal or business
problems are resolved, the Notice of Lien adds enormously to the
inability of the individual to pay their tax debt. Their credit
score will disqualify them from many job opportunities. In those
situations, the Notice is counter productive.
For businesses, the credit stain is equally devastating.
Creditors will stop shipping inventory unless paid for by cash
and banks will withdraw lines of credit, results that will cause
most businesses to immediately fail. A sudden loss of a line of
credit is toxic to the ability of a business to survive in
circumstances where the business is dependant on that line of
credit. All businesses need credit to function efficiently and
effectively. This may be the reason for a very high percentage
of business failures.
For those businesses that would survive without the Notice of
Lien, the Lien is obviously counter productive. Most businesses
have similar temporary financial problems: there are losses of
key employees, hurricanes, the impact of 9/11, embezzlements,
loss of a key customer account, etc. The problems that
businesses have, temporarily leaving them tax-delinquent, are
not insurmountable as the businesses stabilize and grow. There
is a substantial economic loss to the Treasury when businesses
do not survive to pay taxes, provide employment income to
others, and continue to grow their business enterprise.
It is agreed that the IRS Notice of Lien is appropriate in many
cases[5]. The Notice gives the IRS the obvious advantage of
getting priority in bankruptcy and the filing cuts off the
rights of non-perfected claims of other creditors. But the IRS
ignores the intent of Congress when it uses the
bankruptcy-priority argument in all cases. The IRS Revenue
Officers and Revenue Agents and their managers do not take into
account their obligation to weigh the equities and the risks in
determining whether they should file a Notice of Lien in most
cases, and never in mandatory lien situations (i.e. where the
tax liability exceeds the IRS threshold).
The threshold for Filing a Notice of Lien in most IRS offices is
$5,000; anytime the threshold is exceeded, the IRS Notice of Tax
Lien is automatically filed. That automatic filing means that
the IRS has transmuted a discretionary Congressional statute
into a mandatory lien statute contrary to the clear intent of
the Congress. The mandatory lien filings are also contrary to
the IRS Manual.[6]
All Installment Agreements give the IRS the authority to file a
Notice of Lien as part of the terms of an Installment
Agreement[7]. An Installment Agreement is a contract by a
taxpayer to pay their tax debt in installments over a period of
years. Installment Agreements are based upon the premise that
the taxpayer can afford to make the payments. It is anomalous to
file the Notice of Tax Lien when the taxpayer agrees to pay the
tax debt. Further, the Installment Agreement is automatically
cancelled by the IRS if the taxpayer misses a payment, a
built-in trigger that protects the IRS; the IRS could always
file a Notice of Lien if a taxpayer is in default of the
agreement.
There is a systemic problem in Notice of Lien case. Since 1998,
a taxpayer has the “due process” right to appeal the Notice;
however, the damage to credit is unforgiving and immediate. It
takes two or three monthis to get the case to the IRS Office of
Appeals.
The ability to require the filing of a Notice of a Tax Lien as
part of the terms of an Installment Agreement is contrary to the
intent of the Congress because it punishes a taxpayer for
agreeing to pay his tax debt. Congress has gone out of its way
to encourage Installment Agreements as good tax policy.[8].
Further, Congress has expressly authorized the IRS to withdraw a
Notice of Tax Lien when taxpayers enter into an Installment
Agreement.[9] The basic tax policy of the Congress is to
encourage Installment Agreements. The basic policy of the IRS is
to discourage Installment Agreements because it (mostly[10])
requires a tax lien as a term and condition of the Installment
Agreement.
Congress wants both taxpayers and the IRS to follow the tax law
passed by the Congress. The failure of the IRS to follow the law
and its clear tax policy is unacceptable.
From a database of unlimited duration based upon actual case
histories of IRS lien abuse case histories, the IRS Forum will
accomplish the following objectives
• The above analysis defines IRS abuse of the tax law dealing
with tax liens, and it identifies the failure of the IRS to
follow the Congressional tax policy to encourage Installment
Agreements.
• The IRS Forum is the “repository” that will receive and
document case histories from taxpayers throughout the U.S. to
support the conclusion that the IRS has failed to follow the law
on tax liens (e.g., mandatory tax liens). The same case
histories will also document the failure of the IRS to follow
the tax policy articulated by the Congress to encourage
Installment Agreements.
• One taxpayer complaint to a Congressman or Senator gets little
or no attention because Congress cannot interfere with the
administration of the tax law by the IRS. However, when large
scale abuses are documented and collected within the IRS Forum
database, this data will be available to Congress to evaluate
when considering any tax legislation or other action to correct
the documented lien abuse cases.
• The IRS Forum empowers taxpayers, by uniting them as a group,
thereby enhancing their ability to effectively communicate their
IRS abuse issues with greater impact to the public and to the
Congress.
• The IRS Forum is a vehicle to educate the Congress, the media,
and the public about documented IRS Notice of Lien abuse case
histories (e.g., viable businesses that failed solely because of
a capricious tax lien).
• The IRS Forum will create “talking points” for those
individuals and groups looking to facilitate IRS reform and/or
basic tax reform with documented cases of IRS lien abuse cases.
• Data will be available for targeted remediation. For example,
Congress may want to consider a “safe harbor” (i.e., no tax
lien) in specific situations. The Congress may want to draft
threshold procedures before the IRS can file a Notice of Lien
that would otherwise unnecessarily destroy the economic
stability of a family or a business.
• It is important to document instances where the IRS does not
follow the tax policy mandated to them by the Congress. Treasury
has the authority to establish tax policy where none is stated
but not in the present situation, where the Congressional tax
policy is clear. The IRS is required to follow the clearly
expressed intent of the Congress to encourage Installment
Agreements, not penalize taxpayers for entering into Installment
Agreements with a devastating and automatic Notice of Lien.
• The data solicited from the victims of IRS lien abuse cases
will provide evidence to the members of the Congress, the
Treasury, and the Federal Reserve Board proving that the
capricious failure of the IRS to follow the intent of Congress
is counter productive to the economy. Credit is stimulative to
the economy, businesses, to the labor market, and the general
welfare of the American public. The premise for this statement
is that most Notices of Liens (most noticeably in mandatory lien
cases, including Installment Agreements) are avoidable and not
necessary to enforce the IRS collection efforts in many cases.
“IRS Notice of Tax Lien Abuses” was drafted by
irstaxattorney[11] and is intended as a public educational
service. For any questions, contact irstaxattorney@irsforum.org.
[1] Section 6321 of the Internal Revenue Code provides that: If
any person liable to pay any tax neglects or refuses to pay the
same after demand, the amount (including any interest,
additional amount, addition to tax, or assessable penalty,
together with any costs that may accrue in addition thereto)
shall be a lien in favor of the United States upon all property
and rights to property, whether real or personal, belonging to
such person.
[2] United States v. McDermott, 507 U.S. 447, 455 (1993).
[3] Section 6322 of the Code.
[4] Section 6323(a) of the Code. Section 6323(f) of the Code
identifies the place that the IRS need to go to perfect its
lien. In the case of real estate, the IRS statutory lien can be
cut off unless the IRS files is lien in the office within the
State (or the county, or other government subdivision), as
designated by the laws of the State in which the property
subject to the lien is stated.
[5] Internal Revenue Manual 5.12.1.1(05-20-2005) states its
purpose of filing a Notice of Federal Tax Lien (NFTL): The
purpose of filing the NFTL is to protect the Government’s right
of priority against certain third parties, typically a
purchaser, holder of a security interest, mechanic’s lien or, or
judgment lien creditor.
[6] IRM 5.12.2.4.2 (06-09-2005)
[7] See the bottom of IRS Form 433-D
[8] Title X-B.27 of the Conference Report to the American Jobs
Creation Act of 2004 provides new authority to the IRS to accept
part pay Installment Agreements even if the Installment
Agreement does not full-pay the tax debt within the 10 year
statute of limitations for collection by the IRS. This provision
reflects the very strong intent of the Congress to encourage
Installment Agreements.
[9] Section 6323(j)(1)(B) and (C) of the Internal Revenue Code.
[10] We know of no cases where the Notice of Lien was not
required as an essential term and condition for an Installment
Agreement.
[11] IRStaxattorney is a tax attorney who specialized in IRS
controversies, issues and problems. We see IRS abuses of power
on a daily basis. It is hoped that others who practice before
the IRS will also have their abuse cases posted to the IRS
Forum. The IRS Forum does not accept advertising, and there are
no membership fees. The IRS Forum will depend on voluntary
donations, tax deductible under section 501(c)(3), for its
support for editors and other basic staffing to serve it mandate
to provide educational and non-political objectives.
Presented by Alvin Brown and Associates, tax
attorney, formerly with the Office of the Chief Counsel of the IRS.
Call us for all IRS tax issues, problems and emergencies.
www.irstaxattorney.com
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ab@irstaxattorney.com -
(888) 712-7690 - (877) IRS-1172
