TAXJAMS: Simple Solutions
by
Gregory M. McCauley on Aug. 15, 2016
Tax Income Tax Tax Tax Litigation
Summary: This book is a self-help guide for taxpayers to settle their tax liabilities.
CHAPTER 5
Enforced Collection: Tax Liens & Levies
Lien For Taxes
If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount
(including any interest, addi- tional 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.
Internal Revenue Code, Section 6321
lthough the language that Congress drafted in Section 6321 sounds very simple and very broad, it
is, in fact, very complicated.
First, what is a lien? The following are a few of the definitions recog- nized by the IRS:
43
44 T AXJAMS — Gregory M. McCauley
1. A claim or charge on property of payment for some debt, obli- gation, or duty.
• A qualified right to property that a creditor has in and over subject property of his debtor,
as security for the debt or charge or performance of some act.
• A right or claim against some interest in property created by law as incident of contract.
• A right to enforce charge upon property of another for payment or satisfaction of a debt or
claim.
Property Subject To a Tax Lien
In essence, a lien is a claim, or an encumbrance, placed on property. In the case of a lien for
taxes, the Internal Revenue Code creates a lien on all property and rights to property, whether
real or personal. This covers not only real property, which is land and buildings on that land, but
also personal property, which includes furniture, automobiles, stock in companies, money, cash,
gold, coins, equipment, bank accounts, credit card accounts, pensions, IRAs, stocks, bonds, and
anything else that isn’t real property or land.
The lien for taxes also attaches and encumbers future interests in property or earnings from a
taxpayer’s job, wages, contractual earnings, or monthly payments or alimony. Congress was very
broad in the defi- nition of what a lien can be placed on, to ensure that the United States would
be paid for tax debts.
When is a Lien Placed on Property?
The lien arises after the occurrence of three events:
1. assessment of the tax,
Enforced Collection: Tax Liens & Levies 45
2. notice and demand for payment, and
3. nonpayment of the tax due.
This assessment on the tax is upon the filing of the return or the closing of an audit. The IRS
will subsequently send a notice to the taxpayer informing him of the tax debt. Once the assessment
is made, the taxpayer may choose to pay the tax, thereby circumventing the problem, or not pay the
tax and then receive a notice and demand for payment . The notice and demand for payment must be
made before the tax lien is filed and a levy issued.
Let’s not mince words. The IRS will seize your assets when you refuse to pay or to discuss payment
alternatives. Not opening certified mail does not insulate you from the inevitable lien and
seizure. Ignoring unpleasant news does not make it go away. Mailing the certified notice and demand
letter is the obligation of the IRS, and reading that mail is your obligation. Best practice, open
and read certified mail. Your due process rights will be in certified mail. If you miss the 30-day
filing deadline you will forever lose your due process rights. See Chapter 7, Appeal Rights, for
more detailed information.
A tax lien cannot be filed if the IRS has failed to give you valid notice of money owed. This
failure to provide notice will be evident in your account transcript. However, while this failure
complicates the IRS’s ability to collect from a taxpayer, it does not fully protect you from col-
lection of tax debt. Even if it failed to make a valid notice and demand for payment, the IRS can
still institute a judicial proceeding to collect any tax debts. So again, to protect your rights,
open all IRS correspondence.
If you have entered into an installment agreement, the IRS is unable to pursue collection
activities as long as you comply with the terms of the agreement—monthly payments and tax
compliance. Unfortunately, this limitation does not stop the IRS from placing a lien on a your
property during the course of such an agreement, in order to
46 T AXJAMS — Gregory M. McCauley
protect the IRS’s debt collection interest against other creditors and to perfect its claim on your
property in the case of bankruptcy.
Statutory (or Secret) Lien vs. Notice of Federal Tax Lien
Now that you know what a lien is, let’s distinguish between a statutory or secret lien and a notice
of federal tax lien (NFTL). There is a very distinct difference. When you file a tax return and owe
the government money, that is a self-determined tax debt; when the IRS determines through its audit
processes that an additional amount is owed, that is also a tax debt. Let’s say you owe $1,000. If
you don’t pay it, the IRS will send you a notice and demand for payment. If you still do not pay
that debt, the IRS adds penalties and interest to the tax debt.
However, the IRS has not yet filed a tax lien against you, and until that time, this is still a
“secret” lien. The public is not yet aware of your obligation to pay the government. In other
words, third parties are not on notice of the tax lien; they cannot withhold money from you to pay
it over to the government to clear title to your “real” property. Legally, this is referred to as
an Inchoate Lien. This is a valid tax lien, but it has not yet been filed in a county courthouse.
See Form 668: Notice of Federal Tax Lien, in the index. Keep in mind, though, that the 10-year
collection statute has already begun to run.
If a taxpayer does not pay the debt assessed by the IRS within 10 days of being notified, the
government can then file Form 668: Notice of Federal Tax Lien. The NFTL puts the public on notice
that a tax lien in favor of the government has been placed against Joe Taxpayer on all assets that
Joe Taxpayer owns or will own in the future. Thus, buying property from Joe Taxpayer that is
encumbered by the tax lien will result in the IRS having a right to seize the property, if the sale
proceeds do not satisfy the lien.
The lien is only valid against the person(s) as outlined in Internal
Enforced Collection: Tax Liens & Levies 47
Revenue Code, Section 6323. The tax lien imposed is not valid against any purchaser or holder of a
secured interest (a mortgage), mechanics lien, or judgment, until IRS publicly files a notice of
federal tax lien.
The IRS must give you notice of the amount of the tax due and make a demand for payment, IRC
Section 6303(a). The lien relates back to the assessment date and continues until the liability is
marked “satisfied” or is unenforceable due to the expiration of the collection statute or period.
The IRS sends this notice to your last address, and if you have not advised the IRS of a change of
address, the fact that that you did not receive the actual notice is irrelevant, because the IRS
can prove it mailed that notice to your last known address. To change your address, use Form 8827
(see Chapter 4).
The IRS serves each spouse with a notice when you file as married filing jointly, because you are
each individually and personally liable for the tax on the joint tax return. Therefore, to collect
from you, the IRS must send notice to each of the married filing jointly taxpayers request- ing
payment in ten (10) days and thereafter file a notice of federal tax lien. After the IRS has made
service on your last known address, the IRS may begin enforced collection by garnishment, levy, or
asset seizure.
Release of Lien
Generally, a lien will be released by the IRS 10 years after the tax is assessed, unless the IRS
has re-filed the lien or issued a certificate of release of the federal tax lien (CRFTL) before
that point. A CRFTL will be issued either:
1. Within 30 days of you paying the tax debt;
2. Within 30 days after the IRS accepts a bond you submit guaran- teeing payment of the debt; or
3. 14 days after the IRS determines that at the time the NFTL was
48 T AXJAMS — Gregory M. McCauley
filed, you had no outstanding tax debt for the period listed on the NFTL, the assessment was
invalid, or the time period for collecting the tax ended.
The amount of tax debt shown on the NFTL is the amount owed at the time the notice was created.
However, you must keep in mind that as time progresses, the amount actually owed will change, as a
result of interest, penalties, and any payments made to the IRS. To receive an updated lien payoff
amount, call the IRS Lien Unit at 1-800-913-6050.
When you receive a release of lien, make sure to circulate a copy of the document to the credit
reporting agencies. This CRFTL must be kept in your retention register.
Subordination of a Tax Lien
In certain circumstances, when the IRS has a lien on a taxpayer’s property and another creditor has
a lien on the same property (usually through a mortgage), the IRS will allow the tax lien to become
secondary to the other lien. This means that the taxpayer will be permitted to satisfy the
creditor’s lien before the tax lien. This generally is permitted when a creditor refuses to extend
credit to the taxpayer or allow the taxpayer to refinance the mortgage on his home, unless the IRS
will permit the creditor’s lien to be satisfied first. This process of having the creditor’s lien
take priority over the IRS’s lien is called subordination. If you wish to apply for subordination,
you must file Form 14134: Application for Certificate of Subordination of Federal Tax Lien.
For more information on how to apply for subordination, see
Publication 784: Instructions on how to apply for a Certificate
of Subordination of Federal Tax Lien.
Enforced Collection: Tax Liens & Levies 49
How To Challenge a NFTL
Once a NFTL is filed, the IRS will give you written notice of your right to a collection due
process (CDP) hearing within 5 business days. If you wish to challenge the validity of the NFTL,
you must request a CDP hearing by the date shown on the written notice. The address to which you
must send the request should also be on the notice.
The following are some common issues that can be argued at a CDP
hearing :
1. The validity, sufficiency, and/or timeliness of the notice of CDP
rights.
2. Innocent spouse relief.
3. Injured spouse relief.
4. Collection alternatives.
5. Challenges to the appropriateness of collection actions.
6. Challenges to the existence or amount of the liability.
After the CDP hearing, a decision is made regarding the NFTL via a notice of determination. If you
disagree with this decision, you have
30 days to seek review by the United States Tax Court.
What is a Levy?
While a lien is only the IRS’s right to take possession of your property, a levy is the actual
seizure of said property in order to satisfy a tax debt. Not only can property you currently own be
levied by the IRS, but the IRS may also take possession of property which belongs to you but is
currently held by a third party, such as your wages, retirement account, dividends, bank account,
rental income, accounts receivable, the cash value of your life insurance, and commissions.
50 T AXJAMS — Gregory M. McCauley
The IRS can also levy the following federal payments: federal retire- ment annuity income, Social
Security benefits, federal contractor/ vendor payments, and federal employee salary and travel
payments. Generally, if the IRS electronically levies these federal payments, it will take 15% of
each payment.
Once a levy is in place, it continues until the tax debt is fully paid, other arrangements are made
to satisfy the debt (such as a payment plan), the statute of limitations for collection has passed,
or the levy is successfully appealed. A levy on a bank account attaches only to deposits that have
cleared and funds that are available for withdrawal. However, a bank must wait 21 days after
receiving a levy, holding the funds in escrow, before it can send any money to the IRS. This allows
you time to obtain a release of the funds if you would suffer a financial hardship.
The Levy Process
There are usually three things that must occur before the IRS can levy your property. First, the
IRS must determine that there is an outstand- ing tax debt, and send you a notice and demand for
payment. Second, you must fail to pay the money owed for the tax debt. Finally, the IRS must send
you a Final Notice of Intent to Levy and Notice of Your Right to a Hearing. This notice must be
sent at least 30 days before any property is levied.
How to Appeal a Levy
Once you receive a Final Notice of Intent to Levy and Notice of Your Right to a Hearing, you have
30 days to file a request for a collection due process hearing (CDP). At the end of the CDP, the
Office of Appeals will issue a determination. You then have 30 days to request a review of this
determination by the United States Tax Court.
Enforced Collection: Tax Liens & Levies 51
If CDP is not available because you missed the 30-day filing period, you may appeal a proposed or
actual levy under the collection appeals program. For a more detailed explanation of your appeal
rights, see the Chapter 7 on Appeal Rights.
Release of a Levy
The IRS will release a levy if any of the following conditions are present:
1. The tax debt is fully satisfied.
2. The statute of limitations for collection has passed.
3. The IRS failed to send the required notices before the property was levied.
4. The automatic stay of a taxpayer’s bankruptcy is in effect.
5. The levy was on property that the IRS was not permitted to levy.
6. Property was levied while the IRS is considering a payment plan request.
7. Property was levied while an offer in compromise or installment agreement is in effect.
8. Anything regarding the tax debt that resulted in the levy is currently being appealed.
9. The levy is creating an economic hardship on the taxpayer.
10. The value of the property exceeds the tax debt, and a release of the levy on part of the
property will not affect the IRS’s ability to collect enough money to satisfy the tax debt.
11. The expense in selling the property exceeds the IRS’s interest in the property.
12. Releasing the levy will help the IRS collect the tax debt.
If the IRS has issued a levy, you can enlist the taxpayer advocate to assist you in releasing the
levy. You recall from Chapter 2, Tax
52 T AXJAMS — Gregory M. McCauley
Compliance, that you must be compliant for the IRS to work with you. Begin the processes: prepare
your tax return(s) and file Form 911 requesting tax advocate assistance at the same time. The
advocate may obtain a temporary release of levy for you to have time to prepare the tax returns.
Turn to Chapter 7, The Taxpayer Advocate. You will also need to complete Form 433-F and provide
backup documentation. See Chapter 9, Collection Information Statements. If you have not filed tax
returns, see Chapter 3, Case Analysis, to organize and obtain the documents you will need to
accurately prepare and file the returns. When the returns are prepared, copies may be faxed to the
IRS to obtain a release of the levy.
Selling a Taxpayer’s Levied Property
Before the IRS sells property that has been levied, it will give a public notice of the pending
sale. The IRS must wait at least 10 days after the public notice before it can sell the property.
The IRS uses the proceeds first to pay the expenses of the levy and the sale; the remaining money
is used to satisfy the tax debt. If a balance due still remains, you are required to pay that.
However, if the debt is satisfied by the sale and there is money remaining, the IRS will refund
this surplus to you.
You, and anyone else with a legal interest in the sold property, such as a part-owner, have the
opportunity to purchase the property within
180 days of the date the IRS sells it. However, the purchaser of the levied property must be paid
the amount he paid for the property, plus interest at 20%.
You can bid on assets the IRS has seized and is selling by auction on the IRS website at
www.IRSauctions.gov.
© 2024 LAWYER.COM INC.
Use of this website constitutes acceptance of Lawyer.com’s Terms of Use, Email, Phone, & Text Message and Privacy Policies.