By Deborah J. Weber

A federal tax lien is created when the following three things occur.

• Assessment
• Notice and Demand for Payment
• Non-payment

The lien arises on the date of non-payment and relates back to the date of assessment. An assessment creates a lien on all property belonging to the taxpayer. No further filing is required by the Service. However, since only the IRS and the taxpayer are aware of the lien it is often referred to as the “secret lien.” To protect its interest against other creditors of the of the taxpayer, the Service can file a Notice of Federal Tax Lien in the County Clerk’s Office where the taxpayer resides. However, it is important to keep in mind that this filing is not required in relation to the validity of the lien as against the taxpayer. This filing only affects the right of the Service as against other creditors.

The Code provides for a super priority to certain interests that come into existence in relation to accounts receivable and inventory that have turned over for which a UCC creditor has a secured claim. This provision, often referred to as the “45-day rule”, allows a commercial financier to continue to have a secured claim in new accounts receivables or inventory up to 45 days after a Notice of Federal Tax Lien is filed. There are other “super priorities” over a filed Federal Tax Lien. Congress gave a super priority pursuant to IRC §6323(b) to a purchaser of securities (including cash and negotiable instruments), purchase of motor vehicles, retail purchaser, personal property purchase at casual sale up to $1,000, local Government real property taxes, attorney’s liens and miscellaneous other interests.

Relief from Federal Tax Liens

Relief from a federal tax lien can be achieved in one of five ways. The taxpayer can receive a release of lien, a withdraw of lien, a discharge of lien, the lien can be subordinated, or the lien can not attach to certain property. The relief requested or required depends upon the facts and circumstances of the case and, in some situations, the willingness of the IRS to work with the taxpayer to achieve the desired result.

Release of Lien

The IRS’ ability to release a federal tax lien is strictly governed by IRC §6325(a). The IRS can only release a lien in three situations. They are as follows:

1. The taxpayer fully satisfies the liability (this includes the Service’s acceptance of an offer in compromise).
2. The liability is unenforceable (passage of time or invalid assessment).
3. The taxpayer posts a bond which guarantees full payment.

Withdraw of Federal Tax Lien

Although the IRS has discretion in filing a notice of federal tax lien, as stated above it may only release a filed notice if the notice (and the underlying lien) was erroneously filed or if the underlying lien has been paid, bonded, or become unenforceable. However, the Taxpayer Bill of Rights 2 allows the IRS to withdraw a public notice of tax lien prior to payment in full by the indebted taxpayer without prejudice, if the Secretary determines that one of the following circumstances exists:

1. The filing of the notice was premature or otherwise not in accordance with the administrative procedures of the IRS.
2. The taxpayer has entered into an installment agreement to satisfy the tax liability with respect to which the lien was filed.
3. The withdrawal of the lien will facilitate collection of the tax liability.
4. The withdrawal of the lien would be in the best interests of the taxpayer (as determined by the Taxpayer Advocate) and of the Government.

Discharge of Lien

The difference between a release of lien and a discharge of lien is that the release is appropriate when the lien is no longer valid, while a discharge is not contingent on the validity of the lien. Instead, a discharge is appropriate where the lien is still valid, but the lien is discharged as to a specific piece of property. Generally, there are four instances when the IRS will issue a Certificate of Discharge. IRC §6325(b). They are as follows:

1. The value of the taxpayer’s other property is at least twice the value of the tax liability.
2. The taxpayer pays the IRS an amount equal to the value of the tax lien filed against said property.
3. The IRS’ interest in the property is valueless.
4. The taxpayer sells the property and the proceeds of the sale are substituted and encumbered.

Subordination of Lien

IRC §6325(d) states that the IRS can issue a Certificate of Subordination if one of the two following circumstances exist.

1. The taxpayer pays an amount equal to the amount of the lien or interest to which the certificate subordinates the tax lien.
2. The amount of tax that is ultimately collected from the property will be increased and facilitated by the issuance of the Certificate of Subordination.

Certificate of Nonattachment

If a valid federal tax lien is filed against a debtor taxpayer, but appears to attach to the property or rights to property of an innocent third party, a Certificate of Nonattachment can be filed to provide the innocent party with evidence that the property is not subject to the lien in issue, i.e. the lien is not attached. Generally, the Certificate of Nonattachment is used to correct confusion attributable to a similar name, or some other comparable situation.

Levies and Seizures

IRC §6331(b) gives the Internal Revenue Service the power to levy and seize assets. The levy normally refers to action taken by the IRS to take property in the hands of a third party. Seizure normally refers to taking property in the taxpayer’s possession. For example, the Service will levy a bank account and seize a car.

Prior to the Internal Revenue Service taking forced collection action, a Notice of Intent to Levy must by mailed certified to the taxpayer. The final notice is referred to as the Final Notice of Intent to Levy. Prior to this final notice, other warning notices are usually sent. This includes the CP-504 and CP-523 Notices. Although these notices also indicate an intent to levy, it is only after the final notice that the IRS can, in fact, levy or seize. It is also in response to the Final Notice of Intent to Levy that the taxpayer has a Collection Due Process Appeal right. The taxpayer has 30 days to file the Collection Due Process Appeal.

Ways to Prevent Enforced Collection.

A Collection Due Process Appeal can be filed within 30 days of receipt of a Notice of Intent to Levy. This allows the taxpayer the opportunity to request a less invasive collection method by the Internal Revenue Service, such as an offer in compromise or installment agreement. This also gives the opportunity to object to any improper procedure conducted by the Internal Revenue Service.

A Taxpayer Assistance Order provides the opportunity to request a less invasive method of resolving a tax liability. It also provides for an emergency procedure to prevent certain action that would cause undue hardship to the taxpayer, such as a wage levy.

Submitting an offer in compromise through the normal procedures, will normally prevent any collection activity by the Internal Revenue Service.

Lastly, the filing of a bankruptcy will immediately prevent any collection action since the automatic stay goes in effect immediately upon the filing of the petition. Even if the Internal Revenue Service has already seized an asset, as long as the sale has not been conducted, the Internal Revenue Service, under certain circumstances, can be compelled to turn over the property to the debtor under the Bankruptcy Code. Additionally, if the Service has levied on the taxpayer’s wages and refuses to release the levy, a bankruptcy filling will trigger the automatic stay and the Service is prohibited from collecting wages under the levy.

In conclusion, while we all hope to be retained by a client early in the collection process, this is not always the case. However, even after the Service has filed a lien and even after the client is in forced collection, there are things that can be done to assist the taxpayer in dealing with the tax problem and the forced collection efforts of the Service.