Written by attorney Andrew Clifton Moler

Overview of Federal Tax Liens

The tax collection process of taxes owed by a taxpayer to the Internal Revenue Service (hereinafter referred to as the IRS) is a stage-by-stage process that is somewhat convoluted. The IRS procedure for tax collection is generally a two part process with the first part being the determination of the tax liability and the amount owed by the taxpayer and the second part of the process being the actual collection process utilized by the IRS to collect the taxes. Congress has provided the IRS with an extensive, varied and sometime drastic power of assessment of the taxes and subsequent collection. The assessment is nothing more than the bookkeeping entry onto the records of the IRS showing an amount receivable from the taxpayer. This “assessment" is the operative act by the IRS than starts the various time clocks to start the ticking of the time periods that determine such important dates such as the starting of the statute of limitations that limit the amount of time the IRS has to collect the taxes due. The assessment must be completed by the IRS within three years from the date the tax return is due or when it is actually filed, whichever is later. Collection must be initiated by the IRS within ten years from the assessment date. Notwithstanding a few exceptions, the collection process by the IRS cannot be initiated without a timely assessment by the IRS. The assessment process is beyond the discussion contained in this paper as well as the full collection process that can be utilized by the IRS. This paper will be limited to the Federal Tax Lien as it relates to the IRS and the collection process for unpaid taxes.


Nature of the Federal Tax Lien

Once a timely assessment is made by the IRS, the tax liability remains unpaid and proper notice and demand for payment is sent to the taxpayer the government acquires a statutory lien on all the taxpayer’s real and personal property. [1] The statutory lien for the taxes arises at the time the assessment is made, which is the date the summary record of assessment is signed by an IRS assessment officer. [2] The lien itself only gives the government a right to the taxpayer’s property that is superior to that of the taxpayer. [3] Until the IRS files a Notice of Federal Tax Lien, the lien does not provide the IRS with any rights to the taxpayer’s property that is superior to the rights of third party lien holders who subsequently acquire an interest in the taxpayer’s property. [4] It is important to emphasize the fact that the tax lien itself arises automatically resulting from a valid assessment. [5] There is technically no requirement that the IRS actually file a Notice of Federal Tax Lien in the public records for the lien to be operative. The IRS needs to do nothing else for the lien to arise.

The federal government acquires an interest in the taxpayer’s real and personal property to secure payment for the outstanding taxes due that includes any property or rights to property acquired after the lien arises. The tax lien creates an encumbrance on the real and personal property of the taxpayer until the tax liability is paid. What is considered as “property" is governed by state law where the property is located. [6] Notwithstanding this fact, the federal law determines which state law is applicable to the issue. [7] The lien may be satisfied by payment of the taxes, penalties and interest owed, abatement, allowance of a claim or an audit adjustment or discharge of the tax liability through a bankruptcy proceeding. A federal tax lien is considered perfected with the assessment, the demand and nonpayment of the tax. After the lien is perfected it is retroactive to the time of the assessment of the tax. [8]

State homestead exemption laws will not immunize property from attachment by the federal tax lien. [9] It has also been held that property held by the tenancy by the entirety under state law will not prevent the lien from attaching to jointly held property of a husband and wife even if only one of the parties is subject to the tax lien liability. [10] It is the stated policy of the IRS not to file a notice of tax lien until reasonable efforts have been made to resolve the outstanding tax liability through other means of acquiring payment from the taxpayer. [11] Notwithstanding the existence of this written policy, IRS liens have been regularly filed by the IRS through it’s Automated Collection System, without much effort at all given to the exploring of alternative collection methods. [12] The IRS is not required to file a Notice of Federal Tax Lien in all tax liability cases. It is written IRS policy to file a notice of lien where the unpaid balance of an assessment is $5000.00 or more, the taxpayer has entered into an installment agreement for more than $25,000.00 payable in more than five years, an open account with an unpaid balance of $5,000.00 or more is being reported as “currently not collectible", the property is exempt under the federal Bankruptcy Code or state insolvency proceeding, the taxpayer lives outside the United States and the party on which a levy is to be served is likely to file a priority claim under IRC Section 6323. [13]

The government’s interest in property that is subject to a tax lien is afforded numerous procedural protections that protect the government’s interest in said property so in the event a third party claiming an interest in the same property commences any judicial proceeding with regard to the property, the government can be joined as a party [14], may intervene [15] and/or may remove the action to a federal district court. [16] Additionally, the government may start its own initial action to enforce its lien and to direct the sale of the property without any other third party action. [17]

Filing of the Notice of Federal Tax Lien

Historically, before the filing of notice of Federal Tax Liens or conducting any other types of collection activity, there has been minimal supervisory review of the decisions of revenue officers or IRS personnel. In an attempt to correct the unsupervised discretionary and often abusive acts of IRS personnel, Congress changed the federal law in 1998 to mandate that the IRS develop and implement procedures for supervisory review of the determination by IRS employees to file a notice of lien or other collections activities before such action takes place. [18] To protect a taxpayer from erroneously filed tax liens, the IRS code grants taxpayers the right to bring an administrative appeal for the release of the lien after the notice of lien is filed provided the taxpayer has exhausted all administrative remedies. [19] In the event that the IRS files a defective Notice of Federal Tax Lien and the taxpayer is damaged federal law also provides a remedy whereby the taxpayer can file a lawsuit in Federal District Court and be awarded damages if an IRS employee intentionally, recklessly or negligently disregarded the tax Code or any of it’s regulations with regard to collection activities. [20]

[1] IRC § 6321; Byers v. Sheets, 643 F. Supp. 695 (WD Mo. 1986) (The amount of the tax lien includes not only the amount of the tax but also interest and penalties).

[2] IRC § 6322.

[3] Robert E. Meldman & Rickard J. Sideman, Federal Taxation Practice and Procedure ¶1421 (8th ed. 2006).

[4] Id.

[5] IRC § 6321.

[6] Aquilino v. U.S., 363 U.S. 509 (1960).

[7] U.S. v. Webster Record Corp., 208 F. Supp. 412 (SDNY 1962).

[8] IRC § 6322.

[9] United States v. Rodgers, 461 U.S. 677 (1983).

[10] United States v. Craft, 535 U.S. 274 (2002).

[11] Internal Revenue Manual Policy Statement P-5-47.

[12] Robert S. Fink, Tax Controversies Audits Investigations Trials § 3.063.

[13] Internal Revenue Manual (04/30/02).

[14] 28 U.S.C. § 2410.

[15] IRC § 7424.

[16] 28 U.S.C. § 1444.

[17] IRC § 7403.

[18] 1998 Act Sec. 3421.

[19] IRC § 6326 (Even though the appeal is conducted by an independent member of the IRS it is the author’s personal experience that the taxpayer rarely prevails in an administrative appeal).

[20] IRC § 7433 (what Congress giveth the federal courts taketh away. Although Section 7433 gives a remedy for damages for the IRS’ disregard of the Code and Regulations with regard to tax collection activities the author has had personal experience with these lawsuits and opines that the Federal District Courts go out of their way to find reasons to dismiss these actions without affording the taxpayer the Congressionally mandated remedy).

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