A. Introduction
In order to protect the revenue, Congress has provided an administrative means of collection on IRS assessments by attaching a lien to the taxpayer’s property. To expand further, this lien (often referred to as the “general” or “statutory” lien) not only attaches to all of the taxpayer’s property, but to all of the taxpayer’s rights to property, whether real or personal, tangible or intangible, as of the date of the assessment, as well as to all future property and rights to property acquired by the taxpayer.
B. The IRS and its Collection Division
1. What Must Happen Before the IRS Can Collect Taxes?
a. An assessment has to be made. See Section 6201 of the Internal Revenue Code.
b. The IRS must send the taxpayer a notice and demand for payment and give the taxpayer 30 days to pay.
c. If the taxpayer does not pay within the 30-day period, then the IRS may seize assets to pay the taxes.
Once an assessment is made, a lien arises pursuant to Section 6321. This is called a statutory lien. In order for the IRS to perfect its lien, the IRS must file a notice of federal tax lien.
2. IRS Notice Process
Once the IRS makes an assessment against a taxpayer, the taxpayer will generally receive several notices before the IRS will take enforced collection action. A record of account should be ordered. A written response should be made to all notices received from the IRS. It is the Final Notice that is the most important since it gives the taxpayer the right to request a Collection Due Process Hearing.
3. Automated Collection System (ACS)
ACS is the computerized inventory that the IRS maintains of past due accounts and delinquent returns of taxpayers. Taxpayers are contacted by telephone by IRS employees in an attempt to collect the taxes or to secure the name of the taxpayer’s bank so that levies can be served. ACS also attempts to secure delinquent tax returns. In most cases, unless a levy has been served on the taxpayer’s wages, it is best not to give any information to ACS.
4. Statute of Limitations
The IRS has 10 years from the date a tax is assessed to collect the tax. See Section 6502(a).
C. Federal Tax Liens
After an assessment is made, the IRS can file a Notice of Federal Tax Lien. The Notice is filed to protect the interest of the IRS in assets owned by the taxpayer. The IRS is required to notify a taxpayer the first time a Notice of Federal Tax Lien is filed for each year.
For each tax period, the IRS is required to notify a taxpayer the first time the IRS intends to collect a tax liability by taking the taxpayer’s property or rights to property. The IRS does this by sending the taxpayer a final notice of intent to levy notice. The IRS cannot levy or seize a taxpayer’s property within 30 days from the date this notice is mailed, or given to the taxpayer, or left at the taxpayer’s home or office. During that 30-day period, the taxpayer may request a collection due process hearing with the Office of Appeals.
There are two exceptions to this notice of intent to levy provision. The IRS may issue a levy without sending this notice or waiting 30 days when collection of the tax is in jeopardy. The IRS may also levy on the taxpayer’s state tax refund without sending a notice or waiting 30 days. A taxpayer can request a hearing after the levy action in both of these instances. The IRS can now levy on social security payments and take up to 15% of each payment.
Before property can be levied, the taxpayer must be given the following:
- Notice and demand;
- Notice of intention to levy: and
- Notice of a right to a Collection Due Process (CDP) hearing.
For each tax period, the IRS is required to notify a taxpayer the first time the IRS intends to collect a tax liability by taking the taxpayer’s property or rights to property. The IRS does this by sending the taxpayer a final notice of intent to levy notice. The IRS cannot levy or seize a taxpayer’s property within 30 days from the date this notice is mailed, or given to the taxpayer, or left at the taxpayer’s home or office. During that 30-day period, the taxpayer may request a collection due process hearing with the Office of Appeals.
There are two exceptions to this notice of intent to levy provision. The IRS may issue a levy without sending this notice or waiting 30 days when collection of the tax is in jeopardy. The IRS may also levy on the taxpayer’s state tax refund without sending a notice or waiting 30 days. A taxpayer can request a hearing after the levy action in both of these instances.
The IRS can now levy on social security payments and take up to 15% of each payment. Before property can be levied, the taxpayer must be given the following:
- Notice and demand;
- Notice of intention to levy: and
- Notice of a right to a Collection Due Process (CDP) hearing.
Certain property is not subject to a levy. Property that is exempt from a levy is set forth in Section 6334. Examples of exempt property are as follows:
- Wearing Apparel and School Books;
- Fuel, Provisions, Furniture, and Personal Effects;
- Books and Tools of a Trade, Business, or Profession;
- Unemployment Benefits;
- Undelivered Mail;
- Certain Annuity and Pension Payments;
- Workmen’s Compensation;
- Judgments for Support of Minor Children;
- Minimum Exemption for Wages, Salary, and Other Income;
- Certain Service-connected Disability Payments;
- Certain Public Assistance Payments;
- Assistance Under Job Training Partnership Act; and
- Residences Exempt in Small Deficiency Cases and Principal
- Residences and Certain Business Assets Exempt in Absence of Certain Approval or Jeopardy.
D. Pending and Active Installment Agreements
If the taxpayer makes an offer to pay a liability through installments, no levies can be served while the proposal is pending. In addition to the period that an offer or an installment agreement is pending, no levy can be served:
- For 30 days after an offer or an installment agreement is rejected;
- While a rejection of a proposed agreement is being appealed;
- While an agreement is in effect;
- For 30 days after notifying a taxpayer that an agreement has been defaulted and will be terminated; or
- For an additional 30 days after an agreement is terminated while termination (or proposed termination) of an agreement is being appealed.
E. Requirements Giving Rise to Lien
Pursuant to Section 6321 of the Internal Revenue Code (Code), there are certain requirements that must be met before the tax lien arises. These requirements are as follows:
- A tax assessment has been made;
- the taxpayer has been given notice of the assessment stating the amount and demanding its payment; and
- the taxpayer has neglected or refused to pay the amount assessed.
Upon the occurrence of the prerequisites of assessment, demand, and nonpayment, the lien arises automatically. However, the lien is not valid against claims of certain creditors (purchasers, holders of security interests, mechanic’s lienors, and judgment lien creditors) until a notice of the lien has been filed. The Notice of Federal Tax Lien constitutes public notice that a tax lien exists against the taxpayer’s property, including property acquired by the taxpayer after the Notice of Federal Tax Lien is filed. Once the Notice of Federal Tax Lien is filed and becomes a matter of public record, it may adversely affect the business transactions or other financial interests of the taxpayer. The filing of a lien gives constructive notice to everyone that the lien attaches to the taxpayer’s property. The place for filing of the Notice of Federal Tax Lien varies by state. In Texas, the Notice of Federal Tax Lien is filed in the county where the taxpayer resides. Form 668- F is used if a tax lien is refiled for some reason.
F. Continuance of Lien
Once the lien attaches, Section 6322 of the Code provides that such lien shall continue until the liability for the amount assessed is satisfied or becomes unenforceable by reason of lapse of time. This satisfaction of liability may come about through payment or abatement. For example, abatement may result from the acceptance of an offer in compromise, the allowance of a claim, an audit adjustment, or by the discharge of a liability in a bankruptcy proceeding. If no action is taken to pay or abate the assessment, the tax lien will exist for the ten-year statutory period of collection. At the end of the ten-year period, the lien will terminate, provided the statute of limitations has not been extended.
The circumstances under which the statute of limitations may be extended are as follows:
- If the taxpayer is outside the United States for a continuous period of at least six months.
- If the taxpayer executes a waiver extending the statute of limitations (Form 900).
- If the taxpayer declares bankruptcy, in which case the statute on nondischargeable taxes will be extended for the pendency of the bankruptcy plus six months.
- If the taxpayer submits an offer in compromise.
- If the IRS initiates a lawsuit prior to the expiration of the limitation period and later secures a judgment, in which case the statutory period will be extended to the same period as other judgment liens in that jurisdiction.
G. Property Subject to Lien
The types of property subject to the tax lien are unlimited. The tax lien attaches to literally all property belonging to the taxpayer as of the assessment date, as well as that property acquired by the taxpayer during the time the lien is in effect. There are no provisions in the Internal Revenue Code for exemptions with respect to the tax lien.
However, there are certain types of property to which the lien may be inferior. See Section 6232 of the Code.
The holders of the following interests have priority over the IRS lien, even though the IRS lien precedes them:
- Securities sales;
- Motor vehicle sales;
- Retail purchases;
- Casual sales;
- Possessory liens;
- Real property and special assessment liens;
- Small repairs and improvements of residential real property (mechanic’s liens);
- Attorneys’ liens;
- Certain insurance contracts; and
- Passbook loans.
Many lien provisions rely on local law to determine when a claim becomes protected.
The priority position of unrecorded instruments, with respect to federal tax liens, is governed by state law. Further, the law also provides priority generally with respect to certain security interests in personal property, such as accounts receivable, which arise prior to the 46th day after the filing of the tax lien. On the 46th day, the IRS would gain priority with respect to new accounts receivable.
With regard to real property, because of the wide range of “all property and rights to property,” any interest a taxpayer may have in land is likely to be subject to the tax lien.
There is no question that the tax lien will attach to the rights owned by the taxpayer in land fee simple absolute. In addition, although a life estate will terminate at the death of the life tenant, the tax lien will attach to the life tenant’s interest if it arises before his death.
Personal property includes all objects and rights capable of ownership (except estates and interest in land), and generally means money, goods, tangible movable property, and intangible property such as copyrights, patents, and trademarks. Further examples of personal property subject to the tax lien are alimony, bank accounts,
insurance, trusts, licenses, and franchises.
H. Disadvantages of Recording Lien
In some cases, the recording of the lien may hamper the collection process of the IRS. By giving public notice of the existence of the lien, the taxpayer’s ability to pay could be adversely affected. Careful creditors will check to see whether a tax lien is on file and, therefore, not deal with the taxpayer if such lien is found. As a result, the taxpayer would be deprived of the opportunity to acquire the means to pay the delinquent tax. If a Notice of Federal Tax Lien has not been filed, certain people are protected from the effect of the tax lien. However, should these persons make purchases from the taxpayer having “actual notice or knowledge” of the existence of a tax lien, although the Notice of Federal Tax Lien has not been filed, they lose their protected status.
I. Federal Tax Lien Determination
A tax lien filing determination by the IRS must be made on all balance due cases, including reactivated balance due cases, within established time frames. Tax liens will be filed in almost all cases where a large amount of tax is owed. Should the taxpayer desire to sell certain property encumbered by a tax lien, the IRS may issue a Certificate of Discharge of Property From Federal Tax Lien as long as (1) the property can be sold for an amount not less than the value of the interest of the IRS in the property to be discharged; and (2) the taxpayer is divested of all his interest in the property. A lien determination is not required on Streamlined Installment Agreements, but liens may be filed at the discretion of the revenue officer to protect the government’s interest.
J. Appealing the Notice of Federal Tax Lien
Under Section 6320 of the Code, the IRS must notify taxpayers in writing of their right to a Collection Due Process (CDP) Hearing with the Office of Appeals within five business days of the filing of a Notice of Federal Tax Lien. When a taxpayer timely requests a CDP hearing (Form 12153), the taxpayer has a right to judicial review of the determination by the IRS. If a timely request for a hearing is not made, an equivalent hearing may be available. The Appeals Office retains jurisdiction with respect to a lien determination, including subsequent hearings requested by the person who requested the original hearing on issues regarding: (1) collection actions taken or proposed with respect to the determination of the Appeals Office, and (2) changes in circumstances of the taxpayer that affect the determination of the Appeals Office after the person has exhausted all administrative remedies.
If the taxpayer is not successful, the Appeals Office sends the taxpayer a Notice of Determination. The taxpayer then has 30 days from the date of the Notice of Determination to file a petition in the United States Tax Court.
K. Suspension of Collection Period of Limitations
If a hearing is timely requested, the running of the period of limitations will be suspended beginning on the date the hearing request is received. The suspension will end when the decision of the Appeals Office becomes final, i.e., 30 days after issuance of the determination if it is not appealed to the Tax Court. If appealed to the Tax Court, the suspension ends when the decision in the case becomes final. Notwithstanding the above, the period of limitations for collection will not expire before 90 days after a determination becomes final.
Levy action is not required to be suspended during a lien hearing. Levy action is, however, generally suspended pending the determination by the Appeals Office. Levy action can be taken if it is determined that collection is at risk.
L. Certificate of Release of Federal Tax Lien
A tax lien will be released within 30 days after the tax due (including interest and other additions to the tax) has been satisfied by payment or adjustment, or within 30 days after acceptance of a bond. All fees charged in connection with both filing and releasing the tax lien will be added to the balance due.
In order to ensure that any liens are released properly, it is suggested that (1) if payment is made by cash or cashier’s check, release should be immediately requested; or (2) if payment is by personal check, the IRS officer or employee to whom the check was remitted should be contacted in 30 days.
Usually 10 years after a tax is assessed, a lien releases automatically if the IRS has not filed it again. If the IRS knowingly or negligently does not release a Notice of Federal Tax Lien when it should be released, the taxpayer may sue the federal government, but not IRS employees, for damages.
The full amount of the lien will remain a matter of public record until it is paid in full, including all accruals and additions. Once a tax lien is released, all of the credit reporting agencies must be notified as they do not usually note the release on a taxpayer’s record.
M. Certificate of Discharge of Property From Federal Tax Lien
If the taxpayer is giving up ownership of property, such as when selling a home, the taxpayer may apply for a Certificate of Discharge. Each application for a discharge of property from a tax lien releases the effects of the lien against one piece of property.
N. Certificate of Subordination of Federal Tax Lien
In some cases, a federal tax lien can be made secondary to another lien. That process is called subordination.
O. Withdrawal of Federal Tax Lien
In some cases, a federal tax lien can be withdrawn.
P. Certificate of Nonattachment of Federal Tax Lien
A Certificate of Nonattachment is used in cases where there might be a confusion in names, and the tax lien on file does not relate to a person with a similar name.
Q. Collection Appeal Rights
A taxpayer may appeal many IRS collection actions. The two main procedures are Collection Due Process (CDP) and the Collection Appeals Program (CAP). There are other collection actions which have their own specific appeal procedures. These include a proposed trust fund recovery penalty and the denial of an offer in compromise. The assessment of penalties can be appealed, if the taxpayer made a request to have the penalties abated and the abatement was denied. All of the appeal rights have certain time sensitive deadlines.
1. Collection Due Process (CDP)
A taxpayer has the right to a CDP hearing by the IRS Office of Appeals for collection actions involving the first time a Notice of Federal Tax Lien is filed on a tax period; before the IRS sends the first levy on a taxpayer’s property for a tax period; when the IRS levies on a taxpayer’s state refund; and when the IRS issues a jeopardy levy. The taxpayer may contest the CDP decision in the U.S. Tax Court or U.S. District Court, as appropriate.
2. Collection Appeals Program (CAP)
CAP is generally quicker and available for a broader range of collection actions. However, a taxpayer cannot go to court if the taxpayer disagrees with the CAP decision.
3. Requesting a Collection Due Process Hearing
Complete Form 12153, Request for a Collection Due Process Hearing, and send it to the IRS at the address shown on the lien or levy notice within 30 days. The taxpayer should check the IRS actions that he disagrees with and explain why he disagrees with such actions. If the taxpayer receives both a lien and a levy notice, the taxpayer may appeal both actions. The taxpayer must identify all reasons for disagreement, and may raise the following issues relating to the unpaid tax:
a. Appropriateness of collection actions;
b. Collection alternatives such as installment agreement, offer in compromise, posting a bond, or substitution of other assets;
c. Appropriate spousal defenses; and
d. The existence or amount of the tax, but only if the taxpayer did not receive a notice of deficiency or did not otherwise have an opportunity to dispute the tax liability.
A taxpayer may not raise an issue that was raised and considered at a prior administrative or judicial hearing, if the taxpayer participated meaningfully in the prior hearing or proceeding. To preserve the right to go to court, Form 12153 must be sent to the IRS within 30 days of receipt of the notice from the IRS. Under CDP, a taxpayer is entitled to only one hearing relating to a lien notice and one hearing relating to a levy notice, for each taxable period. If a taxpayer receives a subsequent lien or levy notice after requesting a hearing on an earlier notice, Appeals can consider both matters at the same time.
Unless the IRS has reason to believe that collection of the tax is in jeopardy, the IRS will stop levy action during the 30 days after the levy notice and, if the appeal is timely, during the appeal process. Form 12153 will also suspend the 10-year collection statute of limitations until the date the determination is final or the taxpayer withdraws, in writing, the request for a hearing. At the conclusion of the hearing, Appeals will issue a written determination letter. If the taxpayer agrees with Appeals’ determination, both the taxpayer and the IRS are required to live up to the terms of the determination.
If the taxpayer does not agree with Appeals’ determination, the taxpayer may request judicial review of the determination by initiating a case in a court of proper jurisdiction (U.S. Tax Court or U.S. District Court, depending on the circumstances) on or before the 30th day after the date of Appeals’ determination. Once the court rules, its decision will be binding on both the taxpayer and the IRS.
The Office of Appeals will retain jurisdiction over its determinations and how they are carried out. A taxpayer may also return to Appeals if his circumstances change and impact the original determination. However, the taxpayer must first exhaust all administrative remedies.
Representation in Tax Audits & Appeals
Need assistance in managing the audit process? Freeman Law’s team of attorneys and dual-credentialed attorney-CPAs regularly represents taxpayers before the IRS and Texas Comptroller. Our team also provides tax return-related representations and helps taxpayers navigate state tax laws. Our Firm offers value-driven services and provides practical solutions to complex issues. Schedule a consultation or call (214) 984-3000 to discuss our tax representation services.
