If the taxpayer does not pay a tax liability in full and fails to find an alternative method to pay the tax, the IRS may file a Notice of Tax Lien against the taxpayer’s property. § 6320. By filing a lien, the IRS is making a legal claim to the taxpayer’s property as security for payment for the tax debt. (§ 6321) The IRS may only file a Federal Tax Lien after It assesses the liability;
- It sends a Notice and Demand for Payment (a bill that tells the taxpayer how much the taxpayer owe in taxes); and
- The taxpayer neglects or refuses to fully pay the debt within 10 days after the IRS notifies the taxpayer about it.
Once these requirements are met, a lien is created for the amount of the taxpayer’s tax debt. The lien attaches to all the taxpayer’s property (such as the taxpayer’s house or car) and to all the taxpayer’s rights to property (such as the taxpayer’s accounts receivable, if the taxpayer is an employer). It is not necessarily filed in the county clerk’s office.
Releasing a Lien
The IRS may issue a Release of the Notice of Federal Tax Lien (§ 6325) :
- Within 30 days after the taxpayer satisfies the tax due (including interest and other additions) by paying the debt or by having it adjusted, or
- Within 30 days after it accepts a bond that the taxpayer submits, guaranteeing payment of the debt.
In addition, the taxpayer must pay all fees that a state or other jurisdiction charges the taxpayer to file and release the lien. These fees will be added to the amount the taxpayer owes.
If the IRS has not filed it again, the lien will usually released automatically 10 years after a tax is assessed. The taxpayer may sue the federal government for damages If the IRS knowingly or negligently does not release a Notice of Federal Tax Lien when it should be released.
The full amount of the taxpayer’s lien will remain a matter of public record until it is paid in full. However, at any time the taxpayer may request an updated lien payoff amount to show the remaining balance due. An IRS employee can issue the taxpayer a letter with the current amount due in order to release a lien.
Applying for a Discharge of a Federal Tax Lien
If the taxpayer is giving up ownership of property, such as when the taxpayer sell her home, she may apply for a Certificate of Discharge. Each application for a discharge of a tax lien releases the effects of the lien against one piece of property. Note that when certain conditions exist, a third party may also request a Certificate of Discharge. If the taxpayer is selling the primary residence, the taxpayer may apply for a relocation expense allowance. Certain conditions and limitations apply.
By law, a filed notice of tax lien can be withdrawn if:
- The notice was filed too soon or not according to IRS procedures,
the taxpayer entered into an installment agreement to pay the debt on the notice of lien (unless the agreement provides otherwise),
- Withdrawal will speed collecting the tax, or
- Withdrawal would be in the taxpayer’s best interest (as determined by the Taxpayer Advocate) and the best interest of the government.
The IRS will give the taxpayer a copy of the withdrawal and at the taxpayer’s request, the IRS will will send a copy to other institutions.
Appealing the Filing of a Lien
The IRS is required to notify a taxpayer in writing within five days after it files a Notice of a Tax Lien. IRC § 6320. The IRS may give the taxpayer this notice in person, leave it at the her home or her usual place of business or send it by certified or registered mail to the her last known address. The notice, also known as a Collection Due Process notice, must specify the amount of the tax liability and must state that the taxpayer has a right to request a CDP hearing within 30 days. The notice must also outline the administrative appeals rights of the taxpayer and the provisions and procedures to obtain the release of the levy or lien. The taxpayer must file his or her request for a CDP hearing by the date shown on the taxpayer’s notice. It is the customary practice of the Clinic to request a CDP hearing.
A CDP hearing is conducted by an impartial employee of the IRS Office of Appeals. The Appeals Officer should have no prior involvement in the issue that resulted in the collection of the unpaid liability. CDP hearings are conducted informally at the Appeals office. No transcript is taken of the conference and no oath or affirmation is taken. Some of the issues the taxpayer may discuss include:
- The validity, sufficiency, and timeliness of the CDP Notice and the request of the CDP hearing
- Any relevant issue relating to the unpaid tax raised by the taxpayer at the hearing
- Any appropriate spousal defenses raised by the taxpayer at the hearing
- Any challenges by the taxpayer to the appropriateness of the collection action
- Any offers for collection alternatives made by the taxpayer and
- Whether the proposed collection action balances the need for the efficient collection of taxes and the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary.
At the hearing, the taxpayer may also challenge the existence of the liability or the amount of the liability only if he did not receive a Statutory Notice of Deficiency, did not receive it in time to file a tax court petition, or if he did not had any opportunity to dispute the liability. The taxpayer may not raise an issue that was raised and considered at a prior administrative or judicial hearing.
Prior to issuing a determination, the Appeals Officer is required to obtain verification from the IRS office collecting the tax that the requirements of any applicable law or administrative procedure have been met.
The Appeals Office will issue its findings in a dated Notice of Determination sent by certified mail or registered mail to the taxpayer § 6320 (c), § 6330 (d) . While there is no time limit on when the IRS must issue its findings, the regulations require the Appeals Officer to conduct the hearing “as expeditiously as possible.” Once the finding is issued the taxpayer has 30 days to request judicial review.
The Notice of Determination is required to:
- State whether the IRS met the requirements of any applicable law or administrative procedure
- Decide any allowable issue raised by the taxpayer at the hearing (for example, challenges to the liability, spousal defenses, the appropriateness of the collection action)
- Decide whether the levy is required for the efficient collection of taxes in light of a taxpayer’s concern that the collection action be no more intrusive than necessary
- Set forth any agreements reached with the taxpayer, any relief given to the taxpayer, and any actions that the taxpayer or IRS are required to take and
- Advise the taxpayer that the judicial review to the Tax Court or a U.S. District Court must be sought within 30 days of the date of the Notice of Determination (Temporary Reg. §301.6330-1T(e)(3), Q&A –E7)
Applying for Subordination of the Federal Tax Lien
Taxpayer occasionally refinance a loan to secure a better interest rate or to take some equity out of their property. A recorded federal tax lien has the effect of preventing a lender from refinancing the loan. However, section 6325(d) provides relief for taxpayers by permitting the subordination of a federal tax lien.
Subordination can occur in three instances: the refinancing permits the taxpayer to pay the amount of tax owed on the lien; the collection of the tax will ultimately be facilitated; or the IRS determines that the United States will be adequately secured after the subordination. This relief permits a refinancing in order to improve the interest rate on the loan even when there is no cash due the taxpayer. Refinancing also has the effect of facilitating collection because the taxpayer is better able to afford the reduced payments, which may then allow the taxpayer to pay some or all of the tax that is owed.
Publication 784 sets out the procedure and requirements to request subordination. The request is made by sending a subordination notebook that contains enclosures specified in the publication. The notebook is sent to the local technical support office. For Georgia, it is sent to:
Internal Revenue Service
Attn: Technical Services Group 3
Stop 333-D, Room 900
401 West Peachtree Street
Atlanta, GA 30308-3539 ‘
Priority of the Federal Tax Lien
The law involving priority of a federal tax lien is quite complex. The priority of a federal tax lien is relevant when submitting an installment agreement, offer in compromise, or other interacting with the IRS on collection matters. Below is a brief general discussion of this area of the law.
As stated at the beginning of this section, a statutory federal tax lien arises under section 6321 after assessment and notice and demand for payment. The lien attaches to all property and rights to property of the taxpayer, even property acquired after the lien attaches. It has priority over everyone except certain specific persons defined in section 6323 (purchaser for value without notice, holder of a security interest such as mortgages, mechanic’s lien or, or judgment lien creditor.) If the IRS files a Notice of Federal Tax Lien (a formal recordation of the lien), creditors who perfect their lien prior to the recording of the federal lien have priority, but not creditors who perfect their lean afterward.
Upon filing the federal lien notice under section 6323 (f), the IRS becomes a secured creditor with priority over all subsequently arising liens both secured and unsecured. For instance, if a client refinances a properly secured loan even through a loan modification procedure, the new mortgage would not have priority over the filed Notice of Federal Tax Lien. This is why lending institutions insist on a subordination of the federal tax lien as a condition of the modification or new loan. (See website above for discussion of subordination).
There are certain exceptions to the federal lien priority rules that are listed in section 6323(b). In general, the follow is a list of the creditor interests that retain priority:
- Purchaser of a security interest without actual notice;
- Purchaser of a motor vehicle who at the time of purchase did not have actual knowledge of the IRS lien;
- Purchaser of property at retail;
- Purchase of personal property at a casual sale without actual knowledge when the item is less than $1,000;
- Purchaser of property such to a possessory lien under local law security the cost of repair or improvement;
- Real Property Taxes or special assessments;
- Mechanics’ liens;
- Attorneys’ lien;
- Certain Insurance Contracts;
- Depost-Secured Loans;
- Purchase Money Security Interest. While not listed as an exception both the courts and IRS have long recognized this as an exception to the priority rule.
IRC §6320: Notice and opportunity for hearing upon filing of notice of lien
TD 2002FED ¶ 47,017: Treasury Decision 8979, (Jan. 17, 2002)
Documents on IRS.gov
Request for Release of Federal Tax Lien: IRS Publication 1450
Request for Due Process Hearing: IRS Form 12153
Collection Appeal Rights: IRS Publication 1660
How to Prepare an Application for a Certificate of Subordination of Federal Tax Lien: IRS Publication 784