Stop or Appeal Involuntary IRS Collection Action

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, I can help. In many cases, I am able to obtain voluntary IRS or state release of a lien or levy against your wages, bank account, or other property. At other times, I am able to use my knowledge and experience to terminate IRS collection action through other legal avenues. My understanding of IRS collection action will help protect you from abuse of power by the IRS and assert the rights made available to all taxpayers by the Internal Revenue Code, the Taxpayer Bill of Rights, and other federal and state laws. Contact me at The Gaymon Law Firm, PLLC, telephone (703) 407-9130, or by completing the Contact Form contained on this Web site.

The current commissioner and other senior IRS management have made compliance the central theme of today’s IRS. The “kinder, gentler IRS” that grew out of the Internal Revenue Service Reform and Restructuring Act of 1998 (RRA 98) has given way to the firm, unflinching, and aggressive IRS of 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 agency has increased the number of Revenue Officers and other personnel dedicated to collecting delinquent taxes, and has developed new technology and software intended to identify delinquent taxpayers and non-filers.

The IRS enforced collection process begins when the voluntary collection process fails. The IRS collection process is explained in IRS Publication 594, What You Should Know About the IRS Collection Process, however, in actual practice, experience dealing with IRS collection matters and personnel, and knowledge about the various collection defenses that may be available to you, is often the difference in resolving an IRS collection case. Generally, a taxpayer is required to pay a tax along with filing a tax return. However, if a taxpayer fails to timely pay a tax obligation when due, 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 an 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 a classification of the account as “currently not collectible.” Tax liabilities may also be reduced or eliminated, under the right circumstances, using bankruptcy or other legally available processes.

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 and the taxpayer fails to pay the tax upon IRS demand. 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.”

Most taxpayers do not understand that a federal tax lien is placed against the property of the taxpayer immediately, and automatically and without the filing of any notice immediately upon demand and failure to pay a delinquent tax. Often called a “secret lien” (because it is known at that point only by the IRS and the taxpayer), the secret statutory lien created by the Internal Revenue Code – even without the filing of a Notice of Federal Tax Lien – constitutes a lien against all property of the taxpayer, real and personal.

Generally, the federal tax lien created by the Internal Revenue Code has a 10-year life span and runs parallel to the 10-year statute of limitation for collection of a delinquent federal tax liability. However, the life of a federal tax lien and the statutory period for collecting a delinquent federal tax liability (often referred to as the Collection Statute Expiration Date or the “CSED”) can be extended past their 10-year initial terms by a number of different “tolling events.”

These tolling events are too numerous, and their affect on a tax lien and the Collection Statute Expiration Date too complicated, to discuss in detail in this overview. However, some of the more 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 a 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.

1. Pub 594, What You Should Know About The IRS Collection Process.
2. Letter 501 (balance due reminder).
3. Letter 504 (balance due urgent notice).
4. Letter 1058 (final notice intent to file NFTL right to appeal).
5. ACS Letters LT 39 Reminder Notice or LT11 Final notice.

Federal Tax Liens are powerful weapons in an IRS Revenue Officer’s arsenal. IRS Revenue Officers are encouraged to file a NFTL in all cases in which the IRS Revenue officer believes it will promote collection of the tax debt. The circumstances in which the IRS will refrain from filing a NFTL are rare. Internal Revenue Manual (IRM) Section 5.12.2.4.2 requires the Revenue Officer to check current compliance before making the decision not to file an NTFL and describes available lien alternatives such as collateral agreements and lien subordination. Additionally, the Revenue Officer is authorized to delay or withhold filing the lien only if the NFTL will jeopardize collection of the tax. However, the IRM specifically instructs collection personnel to disregard a taxpayer’s argument that the filing of a Notice of Federal Tax Lien will damage the taxpayer’s credit rating unless the taxpayer can supply specific proof that it’s credit rating will be damaged by the filing and that the damage will adversely impact the taxpayer’s ability to pay the delinquent tax.

In every 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 limitation 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. Even counsel is unable to attack the validity of a filed tax lien; 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 should consider proposing other less intrusive collection alternatives, appealing the lien decision to an IRS group manager, and/or filing a Collection Due Process (CDP) Request and exhausting all avenues of appeal.

Levy

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. After the 1998 enactment of the Internal Revenue Service Reform and Restructuring Act of 1998 (RRA 98), the IRS dramatically decreased its seizure action against the tangible property (for example, inventory, automobiles, boats, real estate, and similar property). However, the climate has now changed, and seizure activity is now increasing. Seizures will no longer be a thing of the past, but rather, another powerful weapon in the IRS arsenal.

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.

As the IRS changes its focus from customer service to compliance and collection, all taxpayers and tax counsel must be vigilant to prevent unnecessary levies and seizures. The Internal Revenue Code does provide for the release of a levy or seizure under appropriate circumstances. For example, a levy can be released by an IRS Revenue Officer if the taxpayer proposes and enters into a suitable installment agreement, if the levy creates an undue economic hardship, or if the taxpayer meets the qualification to be classified as “currently not collectible.” However, it is much easier to prevent the execution of a levy than to have it released after issuance. Taxpayers facing enforced IRS collection action must learn their rights and pay attention to all deadlines.

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 the taxpayer 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 (RRA ’98) 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 days 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. By allowing a taxpayer the right to administrative and judicial review of intrusive IRS collection actions, and requiring the IRS to explain and justify its actions, the CDP rights created by RRA ’98 have fundamentally changed the IRS collection landscape. The Appeals Officer selected to hear the matter, and who is required to be independent from IRS collection personnel, is charged with the responsibility to: (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 or federal district court, depending on the kind of tax in question. During the entire pendency of the CDP process and subsequent appeals, the proposed IRS collection action is stayed (stopped). The CDP rights created by RRA ’98 have provided delinquent taxpayers with: (i) statutorily significant administrative and judicial review of coercive IRS collection determinations; and (ii) an effective unilateral right to enjoin (stop) collection activity during the pendency of the CDP appeal process. Taxpayers should not waive or forfeit these important rights without seeking legal advice from experienced counsel.

If you have received a Notice of Intent to Levy or Notice of Filing of Federal Tax Lien, contact me at The Gaymon Law Firm, PLLC, telephone (703) 407-9130, or by completing the Contact Form contained on this Web site.