Tax Liens and Levies by the IRS
Federal Tax Liens
When the IRS feels there is a chance that it will not be able to collect, the agency may file a lien. The filing of the tax lien is usually dictated by the amount. The Lien will be filed in the public records office and is attached to any property you own. Therefore, if you sell the property, proceeds will be used to cover the lien. This also means that anyone that obtains a credit report on you will see the tax lien, and this could negatively affect your access to credit and borrowing.
Federal Tax Levies
A levy is made by taking possession of property belonging to a person who is in possession of any property of a taxpayer. Therefore, the IRS may collect delinquent taxes by seizure of property, removing your property or rights to your property.
A levy may also be served to your employer for wages or to any person who owes money to you.
The Federal Tax Lien – What You Need to Know
A Federal Tax Lien (FTL) represents an encumbrance on a taxpayer’s property or rights to property including real estate, personal and intangible property, a future interest, and property acquired by the taxpayer after the tax lien has come into existence. The amount of the tax lien is based upon the amount of the tax liability. A federal tax lien can adversely impact a taxpayer’s credit rating, impair a business owner’s ability to secure debt or equity financing, and may also result in the suspension of a professional license or revocation of an individual’s passport. In addition, a federal tax lien may foreclose certain employment opportunities, result in embarrassment, loss of reputation, family discord and stress related illness. In more egregious cases, the issuance of federal tax lien can serve as a catalyst for a referral to Criminal Investigation.
While an individual’s first inclination when faced with a federal tax lien may be to seek protection under the U.S. Bankruptcy Code, it is important to note that a federal tax lien may survive the bankruptcy. Hence, the relief may be only temporary. If you are considering bankruptcy you should consult with an experienced bankruptcy attorney as well as a tax attorney to properly analyze whether a bankruptcy filing will achieve the taxpayer’s objective.
The first line of defense against a federal tax lien is paying the tax in full. In cases where the taxpayer is unable to pay the outstanding amount in full, there are alternatives for resolution, including entering into an Installment Agreement, Offer in Compromise or being placed in “Uncollectable” status.A taxpayer who fails to proactively pursue resolution will, more often than not, find himself subject to a federal tax lien and the consequences flowing therefrom.
The starting point for dealing with an imminent filing of a federal tax lien is the acknowledgement that you have a problem with the IRS. Next, if you ever hope to resolve your outstanding tax liability, you must commit to either satisfying or settling the outstanding tax liability. This decision will in all likelihood involve making certain adjustments to lifestyle and creating a game plan.
When faced with a large income tax liability and the inevitable issuance of a federal tax lien, some taxpayers maybe tempted to convey their assets to a relative, friend or shell company, in an effort to frustrate IRS collection efforts. Such transfers are considered fraudulent and will in all likelihood result in the filing of a federal tax lien against the transferee’s property. Often times these actions will conclude with a referral to the Criminal Investigation of the IRS. The landscape is littered with taxpayers who have tried and failed to “Out Toyota” the IRS by placing their assets beyond the reach of the IRS. It is also worthwhile noting that the sophistication and complexity in obscuring the transfer of assets can also result in an enhancement during the sentencing process.
Other taxpayers will avoid dealing with their tax liabilities by pretending the problem doesn’t exist, only to discover that they are now subject to a federal tax lien.
As a taxpayer you should be focused on a strategy to get out of the hole rather than continuing to dig deeper. You also need to be realistic in accepting that the resolution process is not free. If you are sincere about settling your IRS debt it would advisable to speak to a competent tax attorney. In particular, if you have received a Notice of Intent to File a Federal Tax Lien or have been contacted by the IRS, any delay could be costly. The takeaway here is to get ahead of the problem. Likewise, if a Notice of Federal Tax Lien (NFTL) has been filed, you should consult with a tax attorney to discuss remedial alternatives. Remember! There always is a solution.
The following is intended to provide the reader with general information on how federal tax liens come into existence, the procedural process and safeguards against their abuse and the alternatives available for resolution.
The FTL provisions can be found in 26 U.S.C. §6321. A federal tax lien is considered statutory in nature. The validity of a federal tax lien is based upon all of the following criteria being met:
a) An assessment must have been made.
b) A demand for payment must have been made. and
c) The taxpayer either neglected or refused to pay the outstanding liability.
The issuance of a NFTL is not an arbitrary decision, but rather a by-product from the evaluation of objective criteria and the IRS review process. To preserve the integrity of the system, a revenue officer below a G-9 level cannot unilaterally determine that a NFTL should be issued. Instead, any determination must be reviewed and approved by a supervisor. Federal Tax Lien Handbook, Chapter 1 [5.12] 1.3 §1.The failure to adhere to the review procedures may result in disciplinary action against the revenue agent or supervisor. Id. at [5.12] 1.3 §2.
A supervisor’s role in the context of a federal tax lien involves reviewing the taxpayer’s information, verifying that a balance is due and determining that filing a tax lien is justified based upon the taxpayer’s circumstances, the amount due and the value of the taxpayer’s property or right to property.Id. at [5.12] 1.3.1 § 1.
In addition, a revenue officer must always develop and substantiate the following: (i) a summary of any information the taxpayer has provided that may be relevant to the decision to file a lien; (ii) the revenue officer’s explanation and review of information furnished by the taxpayer; and (iii) verification that the amount is due. The revenue officer will also consider: (i) whether the taxpayer was unresponsive to IRS efforts to contact or collect the amount due from the taxpayer; (ii) relevant information related to the taxpayer’s financial condition; (ii) whether the taxpayer is a multiple offender; (iii) whether the taxpayer has made any efforts to pay the tax; (iv) whether the taxpayer is current with respect to his tax filings and the payment of any income tax.; and (vi) whether a federal tax lien has already been filed.Id. at [5.12] 1.3.1 §1 and §2.
Where the taxpayer’s property is real estate the NFTL is filed in the state, county or other subdivision’s recording office that is designated by state law where the property is located. In cases involving personal property, the NFTL is filed in the state, county or subdivision designated by state law, where the property is located.
In cases where the property subject to the NFTL is located in a state that has failed to designate one office as the place to file the NFTL, the IRS may file the NFTL with the clerk of the district court for the United States District Court for the judicial district where the property subject to the NFTL is located.
Before filing the NFTL, the IRS must make reasonable efforts to contact the taxpayer to advise him that a NFTL may be filed in the event the payment is not made. For purposes of contacting the taxpayer the IRS may use the telephone, in person or by mailing a notice or letter to the last known address. The IRS must also give the taxpayer an opportunity to make payment or other security arrangements and must also advise the taxpayer the impact a NFTL may have on normal business operations or credit rating. The foregoing must be evaluated in the context of certain restrictions imposed by 26 U.S.C. § 6304 (The Fair Tax Collection Practices. Id at [5.12] 1.4, §1-4.
If the taxpayer disagrees with the proposed lien filing, the IRS must advise the taxpayer of his right to appeal. The IRS must advise the taxpayer that he has the right to the Collection Appeals Process and that the taxpayer also has a right to a Collection Due Process Hearing.Id at [5.12] 1.4, §5.
If a taxpayer pays the outstanding tax obligation in full, the IRS will issue a Release of NFTL within 30 days when the outstanding amount is fully satisfied or becomes unenforceable.
Depending upon the specific circumstances, it may be possible for a taxpayer to remove a federal tax lien utilizing one of the following:
- Certificate of Discharge of Federal Tax Lien. A Discharge of a federal tax lien is required in cases where the taxpayer is selling real estate that is subject to such a lien. The Certificate of Discharge is appropriate in two instances: First, where the IRS is the only creditor and the sales proceeds are sufficient to cover 100% of the outstanding tax liability; Second, where the IRS federal tax lien is subordinate to a senior lender, such as a mortgagee, and the sales proceeds are insufficient to pay both the senior lender and the IRS. In this instance, the IRS lien may be “crammed down.” An Application for a Certificate of Discharge is made on Form 14135. Please see Publication 783 for further information please sees. https://www.irs.gov/pub/irs-pdf/p783.pdf.
- Certificate of Subordination of Federal Tax Lien.In cases where there is insufficient funds from a sale to satisfyboth the IRS and a junior creditor, who refuses to compromise its debt, Sections 6325(d) (1) and 6325 (d) (2) permits a named creditor to move from their junior creditor position ahead of the United States. The process is known as “Subordination.” A request for a Certificate of Subordination of Federal Tax Lien is made on Form 14134. For further information please see Publication 784 at https://www.irs.gov/pub/irs-pdf/p784.pdf.
- Certificate of Non-Attachment. Section 6325(e) of the Internal Revenue Code provides that a Certificate of Non-Attachment may issue when any person is or may be injured by the appearance that a federal tax lien attached their property. While a Certificate of Attachment is commonly requested when a person with a similar name is confused for the taxpayer named on the NFTL, the Certificate can also be used in other situations to clarify the attachment of the lien to certain property. For specific instructions please see Publication 1024 at https://www.irs.gov/pub/irs-pdf/p1024.pdf.
- Release of Federal Tax Lien. In cases where the IRS has failed to issue a Release of Federal Tax Lien, within the 30 day period following full payment of the amount owed, the taxpayer may request a Release of Federal Tax Lien. The request must contain the following information:The date of the taxpayer’s request.
a) The name and address of the taxpayer.
b) One copy of each Notice of Federal Tax Lien the taxpayer wants released.
c) Why the lien should be released, and
d) A telephone number with the best time for the IRS to call the taxpayer should they need additional information.
If the taxpayer has paid the tax liability, he needs to enclose a copy of any of the following with the request:
a) An Internal Revenue receipt.
b) A canceled check.
c) A record of payment by electronic fund transfer.
d) Any other acceptable proof of payment.
For further information please see Publication 1450 at https://www.irs.gov/pub/irs-pdf/p1450.pdf
- Application for the Withdrawal of Filed Form 668(Y) Notice of Federal Tax Lien. In 2011 the IRS launched the “Fresh Start” initiative which provides a taxpayer with relief from a federal tax liens in two situations:
a) The first option may permit the Withdrawal of the Taxpayer’s NFTL after the lien’s release. Qualification is based upon the following conditions: (i) The tax liability has been satisfied and the lien has been released; (ii) The taxpayer has been in compliance for the past three years in filing all individual, returns, business and information returns; and (iii) The taxpayer is current on his estimated tax payments and federal deposits, where applicable.
b) The second option permits the IRS to Withdraw the NFTL in cases where the taxpayer has entered in or converted a regular installment agreement to a Direct Debit Installment Agreement. The conditions for qualification are: (i) The taxpayer is a qualifying taxpayer (Either an individual, business with income tax liability only or a business that is out of business (any type of tax); (ii) The taxpayer owes $25,000 or less; (iii) The Direct Debit Installment Agreement must pay the outstanding tax liability within 60 months; (iii) The taxpayer must be in full compliance with other filing and payment requirements; (iv) The taxpayer has made three consecutive direct debit payments; and (v)The taxpayer cannot have defaulted on either the current, or any previous Direct Debit Installment Agreement.Please note that a taxpayer with a tax liability greater than $25,000 may also qualify for the Fresh Start Program provided the individual makes a down pay sufficient to reduce the amount owed to $25,000 or less. An Application for Withdrawal of Filed Form 668(Y) Notice of Federal Tax Lien requires the completion of Form 12777.
If you have received a Notice of Intent to File Federal Tax Lien, or have been contacted by the IRS and advised that a federal tax lien will be filed, it may be possible to resolve you case without the IRS filing a NFTL. Even in cases, where a NFTL has already been filed it may be possible to have the NFTL removed. In either case, you should consult with an experienced tax attorney to discuss resolution strategies.
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The Law Office of Anthony N. Verni can represent you. Our focus is on working with you to interpret the tax laws, establish a structured path for compliance, and find the best solution for you based on efficiency and transparency. We have over 20 years of experience and a high success rate. The longer you wait, the more complicated your situation may become. Contact us today.