Federal Tax Liens
The reach of the tax lien is as broad as is taxpayer’s property. The enabling statute, I.R.C. § 6321, provides that the federal tax lien attaches to all of the taxpayer’s property and rights to property. The effect of a notice of tax lien can be harmful to a taxpayer. The taxpayer might find transferring property to be difficult. Credit might be impaired so that the taxpayer cannot gain access to credit, which ironically might have been the source of payment of the delinquent taxes.
The first taxpayer strategy to avoid having a tax lien filed is to reach agreement with Collections personnel before they decide to file a notice of tax lien. The damage done by a tax lien is not the existence of the tax lien as much as the filing of the public notice of tax lien.
A second strategy for a taxpayer is use of the Collection Appeals Program (CAP). The taxpayer initiates a Collection Appeal by filing a Form 9423 with the manager of the Service employee with whom the taxpayer is dealing. The CAP procedure is particularly useful because the procedure affords the taxpayer immediate review of the decision to file a notice of tax lien by the manager and an Appeals Officer.
A third strategy for a taxpayer wanting to avoid a notice of tax lien is to file a Form 911 (Application for a Taxpayer Assistance Order) with the local Taxpayer Advocate. If the filing of the notices of tax lien would create an undue hardship for the taxpayer, the taxpayer advocate should be willing to intervene, investigate the situation and seek alternative solutions. The taxpayer advocate can also help with many problems where normal channels are not working correctly.
If the taxpayer cannot resolve the matter with the Service employee in the above manner, a fourth taxpayer strategy would be to file an Offer in Compromise (Form 656) or requesting an installment agreement. The installment agreement is a more formal procedure than a payment plan. The chief procedural advantage to a taxpayer facing impending collection activity of an offer in compromise or installment agreement is the suspension of collection activity.
If the taxpayer cannot prevent notices of tax lien from being filed, or a tax lien notice was filed before the taxpayer awoke to available remedies, then the next strategy for the taxpayer is to file a Collection Due Process (CDP) appeal. When the lien is filed, the Service is required to give the taxpayer notice of that fact and provide the taxpayer with an opportunity for a collection due process hearing. The CDP appeal is perfected by filing a request for a CDP hearing by use of Form 12153. Assuming proper procedures were followed and the lien is a valid lien, the taxpayer can request a withdrawal of the notices of tax lien under section 6323(j). Withdrawal may be appropriate where the taxpayer has missed his CDP opportunity or where the taxpayer is actively attempting to pay the tax liability and finds the lien is itself an impediment to paying the tax.
If a taxpayer (or other person) against whom a notice of federal tax lien is filed believes there has been an “error in the filing of the notice of lien” then an available strategy is to appeal to the Service for release of the lien. The appeal procedure is intended to be used only for purposes of publicly correcting the erroneous filing of a notice of federal tax lien.
Taxpayers wishing to obtain relief from an already-filed notice of tax lien can request four types of administrative relief under authority of section 6325:
- A release of a tax lien operates to completely extinguish the tax lien, thereby discharging from the effect of the lien all of the taxpayer’s property that was subject to the lien. If the tax liability is fully satisfied, is legally unenforceable, or is secured by an adequate bond accepted by the Service, the taxpayer may apply for a release of the federal tax lien.
- A discharge of property from a federal tax lien removes certain specifically described property from the effect of such lien. The tax lien continues in effect upon all of the taxpayer’s other property to which it has legally attached.
- A subordination of a tax lien relegates the lien to a lower priority position in favor of a specific named lienholder or lienholders. Requesting a subordination of a tax lien would be an appropriate procedure if the taxpayer was seeking to obtain new or replacement financing to apply the proceeds to the tax liability or to facilitate payment of the liability.
- A nonattachment of a tax lien contemplates a certificate from the Service confirming that the tax lien does not attached to specified property. This procedure is useful to straighten out confusion in names, such as when a person of like or similar name is not, in fact, the taxpayer against whom the lien is filed.
- A payoff letter is appropriate where the taxpayer plans to sell the property and use the proceeds to pay off the tax debt. The taxpayer can ask for this from the liens section of the Service.
Taxpayers have some recourse from the Service’s failure to release the tax lien. Taxpayers are permitted to bring a civil action for damages against the United States in Federal court for failure of any officer or employee of the Service, “knowingly or by reason of negligence,” to release a federal tax lien in accordance with the provisions of section 6325.66 By virtue of this statute, the United States waives sovereign immunity from suit. If a successful action is brought on account of the Service’s failure to release a tax lien, then the taxpayer is entitled to damages. A condition to the suit for failure to release a lien is that the taxpayer first exhaust all administrative remedies.