IRS Liens and Levies
Whether IRS collection action is just beginning, or if the IRS has already issued a lien or levy against you, your wages or your other property, we can help. Often, we can arrange for the voluntary termination of a wage or bank levy by the IRS. At other times, we are able to use our knowledge and experience to terminate IRS collection action through other legal avenues.
The Internal Revenue Service has made compliance the central theme today. IRS examination and collection budgets have risen dramatically, and the IRS has made the collection of delinquent and unreported taxes a high priority. The Service has increased the number of Revenue Officers and other personnel dedicated to collecting delinquent taxes, and has developed new technology and software intended to make more efficient the pursuit of delinquent taxpayers and non-filers.
The IRS enforced collection process begins when the voluntary collection process fails. If a taxpayer fails to timely pay a tax obligation, the delinquent tax obligation is assessed by the IRS by entering the liability on the appropriate IRS master file. A notice and demand for payment is then sent to the taxpayer. After IRS demand for full payment is made, the taxpayer can either voluntarily comply by making payment, or seek alternative payment arrangements, including, but not limited to, a partial or full pay Installment Agreement, an Offer-in-Compromise, or classification of the account as currently not collectible.
Once the IRS has determined that a taxpayer is not voluntarily paying his or her tax obligation, and all appeal rights have expired, the IRS is required to commence involuntary collection action. The IRS has many involuntary collection tools at its disposal. For example, the IRS can file a Notice of Federal Tax Lien, serve a levy on your wages or bank account, assess a Trust Fund Recovery Penalty, or even attempt to seize your house, car or other property.
- Federal Tax Lien
A federal tax lien is created by statute as soon as a tax is assessed, IRS demands payment and the taxpayer fails to pay. Internal Revenue Code (IRC) §6321 states, “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.”Generally, the federal tax lien created by the Internal Revenue Code has a ten year life-span and runs parallel to the 10-year collection statute of limitations. However, the life of a federal tax lien and the statutory period for collecting a delinquent federal tax liability can be extended past their 10 year initial terms by a number of different “tolling events.”
Most common tolling events include the filing of a request for an IRS Collection Due Process Hearing, a bankruptcy filing, or seeking a Taxpayer Assistance Order, or entering into a voluntary waiver with the IRS. In any event, the IRS right to assert a federal tax lien and to seek involuntary collection of a delinquent federal tax remains in effect until the delinquent tax is satisfied or the statute of limitations for the tax and/or lien has expired. Calculation of the statute of limitations periods for a delinquent tax and related federal tax lien are critical in order to properly represent a delinquent taxpayer in an IRS collection case.
- Notice of Federal Tax Lien
A Notice of Federal Tax Lien (NFTL) is filed to make the public and other creditors aware of the existing tax lien and to establish the government’s priority against other creditors or potential purchasers of your property. As described above, a federal tax lien arises upon assessment, demand for payment and failure to pay the delinquent tax liability. Although immediately applicable against the taxpayer, a tax lien will not affect the rights of a subsequent judgment creditor, mortgage lender or secured lender or “bona fide” purchaser until a Notice of Federal Tax Lien is filed. By filing the NFTL, the IRS obtains priority against all subsequent claimants. In many cases, the filing of a NFTL will also have a significant, adverse affect on a taxpayer’s credit and credit score.
- Requirements before Filing Federal Tax Lien
The IRS is required to make reasonable efforts to contact the taxpayer before issuing an NTFL. Reasonable efforts are considered to be the issuance of an assessment, demand for payment and mailing of the following notices during the collection process.
- Pub 594, What You Should Know About The IRS Collection Process.
- Letter 501 (balance due reminder).
- Letter 504 (balance due urgent notice).
- Letter 1058 (final notice intent to file NFTL right to appeal).
- ACS Letters LT 39 Reminder Notice or LT11 Final notice.
Federal Tax Liens are among the most powerful tools in an IRS Revenue Officer’s tool kit. Revenue Officers are encouraged to file a NFTL whenever the Officer believes it will promote collection of the tax debt. The circumstances in which the IRS will refrain from filing a NFTL are rare, but the Revenue Officer is authorized to delay or withhold filing the lien only if the NFTL will jeopardize collection of the tax.
In all case involving a filed tax lien, tax counsel should confirm the validity of the lien, the procedures used by the IRS to file the NTFL, and the limitations period remaining for the lien. The impact of a federal tax lien is broad and the remedies complex. Many times, the NFTL is filed improperly or in the wrong place. On other occasions, the IRS will inadvertently fail to release a lien after the statute of limitations has expired.
Experienced counsel can often help obtain IRS subordination of the lien or discharge of the lien to refinance or sell a taxpayer’s property. If a lien has not yet been filed, counsel can propose less intrusive collection alternatives, appeal the lien decision to an IRS group manager, and/or filing a Collection Due Process (CDP) Request.
IRS authority to levy on (take) a taxpayer’s property is provided by Internal Revenue Code §6331(a) stating, “If any person liable to pay any tax neglects or refuses to pay the same within 10 days after the notice and demand, it shall be lawful for the Secretary to collect such tax…by levy upon all property and rights to property belonging to such person…” A levy is the actual attempt by the IRS to seize the property of a taxpayer held by a third party. The most common types of IRS levies include wage levies, bank account levies, and levies on a taxpayer’s securities and accounts receivables. However, if the taxpayer does not have financial assets sufficient to satisfy a delinquent tax liability, the IRS can also attempt to seize physical property directly from the taxpayer.
The term “levy” is virtually synonymous with the term “seizure.” Although most tax professionals use the term levy in connection with IRS taking of a taxpayer’s property held by a third party (for example, taking a bank account or wages to be paid by an employer) and use the term seizure is used to refer to the IRS taking tangible real or personal property directly from the taxpayer (for example, seizure of a taxpayer’s inventory, automobile, boat, and even real property), the statutory authority for and the result of a “levy” or “seizure” are the same: the IRS has taken property of a taxpayer in order to satisfy a delinquent tax liability.
Important Collection Due Process (CDP) Rights
Before sending a levy notice to your bank, employer, or other third party holding your property, the IRS must send you another very important notice: a Final Notice of Intent to Levy and Notice of Right to a [Collection Due Process] Hearing (referred to as a “CDP Request”). The taxpayer’s right to make a CDP Request and receive a CDP Hearing prior to the execution of an IRS levy against taxpayer property (or to oppose the filing of a Notice of Federal Tax Lien) was created by the Internal Revenue Service Reform and Restructuring Act of 1998 and is one of the most powerful tools available to a taxpayer to prevent IRS abuse of its power and to obtain the least intrusive payment method for a delinquent tax liability. A CDP Request must be made within 30 of the date contained on the IRS Final Notice of Intent to Levy and Notice of Right to a [CDP] Hearing (or Notice of Federal Tax Lien) and failure to provide a timely and proper CDP Request can result in the loss of significant taxpayer rights and remedies. DO NOT IGNORE YOUR CDP RIGHTS.
After issuing a Notice of Intent to Levy and Notice of Right to a CDP Hearing (or a similar Notice Intent to File Federal Tax Lien), and receiving a timely CDP Request, the IRS is required to schedule a CDP Hearing with an Appeals Officer. The Appeals Officer selected to hear the matter is required to be independent from IRS collection personnel, and must: (i) verify that the IRS followed all administrative and procedural requirements (“verification”); (ii) determine if the proposed IRS collection action “balances the need for efficient collection of taxes with the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary” (“balancing”); and (iii) consider all less intrusive collection alternatives (for example, an Offer in Compromise of Installment Agreement) proposed by the taxpayer in his CDP Request.
Following a CDP Hearing, the Appeals Officer must issue a written determination summarizing his or her conclusions concerning verification, balancing and the use of other proposed less intrusive collection alternatives. Moreover, in the event of an adverse determination by the Appeals Officer, the taxpayer may contest the determination by filing an appeal in the United States Tax Court. During the entire pendency of the CDP process and subsequent appeals, the proposed IRS collection action is stayed (stopped). Taxpayers should not waive or forfeit these important rights without seeking legal advice from experienced counsel.