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IRS collections – Federal Tax Liens

Houston Tax Attorney

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IRS collections – Federal Tax Liens

Anyone who has been in trouble with IRS tax debt probably has some experience with a federal tax lien. Learn about what an IRS tax lien is, how it’s filed, and what you can do to get it released.

How a Federal Tax Lien is Created

After the IRS makes a tax assessment (when you file your return, through an audit adjustment, or an amended return filing), the IRS is required to give notice and demand for payment within 60 days. If the taxpayer fails to pay, a tax lien arises and attaches to all property owned on or after the date of the tax assessment. A lien continues until the underlying tax liability is satisfied. If it is not, then the lien will exist for the entire 10-year collections statute of limitations period.

A lien is only an encumbrance – it does not result in an actual transfer of property. For an actual transfer of property, the IRS must levy upon the property. Levies can either be directed to the taxpayer to seize tangible real and personal property belonging to the taxpayer, or it can be served on third parties such as banks and employers to levy bank deposits and wages. In FY2015, IRS levies on third parties totaled 1,464,026.

What Property is Subject to an IRS Tax Lien?

The general rule is that a federal tax lien attaches to all property and rights to property, both real and personal that belong to the taxpayer under IRC § 6321.

  • Real Property. This includes primary residences, secondary residences, land, and rental properties. The homestead exemption does not apply to a federal tax lien.
  • Personal Property. Personal property can include money, goods, tangibles (e.g. jewelry, cars, tools), and intangible property. Additional personal property subject to a federal tax lien includes bank accounts, insurance proceeds, retirement plans, pension plans, trusts, licenses, and franchises.

Note: For married couples in Texas, a community property state, there are a number of factors that may determine which property is subject to a tax lien, such as 1.) whether the debt was incurred prior to or after marriage, 2.) whether the couple have separate property, and 3.) whether the filing status is married filing jointly or separately.

Filing of a Federal Tax Lien

While is not necessary for a federal tax lien to be filed or recorded to be valid against the taxpayer, the IRS often does file a Notice of Federal Tax Lien with the County Clerk in order to have priority over other creditors.

Procedures for filing: For real property, the lien is filed in the county where the property is located. And for personal property, the lien would be filed in the county where the taxpayer resides.

Procedures for notifying taxpayers: IRC § 6320 requires the IRS to notify taxpayers in writing at their last known address within 5 business days of the filing of a Notice of Federal Tax Lien. While it is required to be sent via certified mail, there is no requirement that the taxpayer must sign or physically accept the delivery to be valid notice.

Relief from a Federal Tax Lien

Every lien that is filed will eventually be released, either after payment, by entering into a payment plan, or expiration of the 10-year collections statute of limitations. For those concerned about their credit scores, a lien release is not enough. A released lien will remain on the taxpayer’s credit history for 7 years after it is released. Combined with the 10 year statute of limitations, that’s 17 years that a lien can affect your credit history!

Fortunately, pursuant to IRC § 6323(j)(1)(D) and clarified in an IRS Office of Chief Counsel memorandum (PTMA 2009-158), the IRS may withdraw a federal tax lien after it has been released. This is not automatic – the IRS must be petitioned to withdraw the lien by the taxpayer. If the IRS accepts, then credit reporting agencies will receive a notice of withdrawal of a Notice of Federal Tax Lien, thereby which they are required to delete any references to the tax lien in the taxpayer’s credit history. It’s essentially as if the lien never existed. Additionally, IRC  § 6323(j)(1)(B) allows the IRS to withdraw a lien when the taxpayer enters into an installment agreement and meets certain requirements.

Conclusion

Often taxpayers with outstanding tax debt are not even aware that the IRS has filed a lien against their property. If you’ve moved or used a PO Box address on your tax return, you may have never received the notice. Regardless of whether you’re aware of the lien filing or not, a federal tax lien can lower your credit score by an average of 100 points and make it impossible to buy or sell a home, get a loan, or finance a car. Additionally, you may face scrutiny during a job application process when the employer conducts a background check and discovers the lien. It can be embarrassing to have a federal tax lien in public records for anyone to access and view.

If you’re dealing with an IRS tax lien, you should know that you do have rights and ways to get relief.

IRS Fresh Start Initiative

Houston Tax Attorney

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IRS Fresh Start Initiative

A few days ago I heard yet another ad on the radio from a national “debt resolution” firm discussing the “new” IRS Fresh Start initiative. As usual, the ad promised to settle IRS tax debts for pennies on the dollar. The program is not new – it’s been around for almost 5 years. Even though countless number of debt resolution firms have been shut down by consumer protection agencies, consumers will continue to fall victim to these firms because they do not understand the process.

IRS Collections Process

I wrote about the IRS collections process previously, but here’s a more succinct version. IRS debt usually arises from one of three situations:

  1. A tax return is filed showing tax due.
  2. An adjustment resulting in additional tax due is made by the IRS through an in-person audit, correspondence audit, or by the taxpayer filing an amended return.
  3. The IRS files a substitute for return showing tax due.

In all of these cases, the IRS must assess the taxpayer’s liability and demand payment. The assessment date is important as that is the date the collections statute begins to run (10 years). Following the assessment, a notice and a follow up notice will be sent to demand payment. If payment is not made, then the collections process begins.

Phase 1 of collections consists of a series of computer generated (CP) notices sent by the IRS Service Centers. Cases that are not resolved through this process go onto phase 2.

In phase 2 of collections, the taxpayer’s account is forwarded to the Automated Collections System (ACS). ACS has the authority to place liens on your assets, levy your bank account and other assets, garnish your wages, and enforce a lien against any 3rd party income source.

If ACS is not successful in getting an agreement from you to pay your tax debt, the case may go to Field Collections, which will result in a Revenue Officer coming out to your home or place of work. Some cases may bypass ACS and go directly to a Revenue Officer. This is typically seen with large balances or trust fund recovery cases. Revenue Officers possess tremendous authority to both settle debt cases and take enforcement action. If you are represented by power of attorney, the revenue officer will contact the representative listed on your power of attorney.

In summary, once the IRS has assessed a tax and made payment, and the taxpayer does not pay the bill or make arrangements to pay, the IRS will continue to take collection action.

Relief under the IRS Fresh Start Initiative

If you can’t fully pay your tax bill, then you may qualify for one or more options under the IRS Fresh Start Program. However, taxpayers should be aware that this isn’t a magic wand. In the vast majority of cases, taxpayers will still pay a large portion of the taxes due.

  1. Penalty abatement. Without getting much into the details, this portion of the Fresh Start Initiative usually doesn’t provide much relief for taxpayers. Other than First Time Abatement, all the other penalty abatement categories are difficult to qualify under.
  2. Installment agreement. If you owe less than $25,000 and are able to pay the balance within 72 months, you qualify for a streamlined agreement. Go to IRS.gov and set up an installment agreement. If you owe $25,000-$50,000, there’s a relaxed streamlined agreement but the IRS will request some financial information. If you owe more than $50,000, you do not qualify for a streamlined agreement, and the IRS will request substantial financial information to determine your ability to pay. It’s a good idea to hire a tax attorney when your debt is over $50,000 in order to minimize your monthly payments and take advantage of any nearing collection statute of limitations dates.
  3. Tax lien relief. The Fresh Start program has increased the minimum liability for filing a tax lien from $5,000 to $10,000. Additionally, taxpayers are now able to request a “withdrawal” of a tax lien that has been “released.” A withdrawal will remove the lien from your records and assist you in repairing your credit report.
  4. Offer in compromise. An offer in compromise is a lump-sum payment arrangement with the IRS where the taxpayer would not be able to pay his full tax liability before the expiration of the collections statute. Essentially you agree to pay $X amount in exchange for the IRS wiping out the tax debt. The amount depends on multiple factors, including your future earning capacity, current assets, secured debts, the number of individuals in your household, and other factors. Theoretically, the amount could be as little as $1 if you have no net worth and no future earning potential. Realistically, most taxpayers do not qualify for an offer in compromise, and for those that do, the offer amount will still need to be a significant portion of the debt in order to be accepted.

Summary

So the next time you see or hear an ad promising to settle your debts for pennies on the dollar, you know the ad is referring to the offer in compromise program. Keep in mind that you will likely not qualify, and if you do, you will likely still pay a large portion of your debt. What do you have to lose by hiring these companies and submitting an offer you don’t qualify for?

  1. You’ll pay a required 20% of the offer with the application. The IRS will not return that 20% if the offer is rejected.
  2. You’ll lose your fees paid to the debt resolution firm, which can be as much as $7-8,000.
  3. You’ve given a road map to the IRS to seize your assets. An offer in compromise requires extensive reporting of your financial information to the IRS. If the offer is rejected, you’ve basically given the IRS all the information it needs to seize those assets.

The best approach to resolving large balance IRS debt is a methodical approach that is likely to succeed. Here’s what we will do for you:

  1. Review your account transcripts and financial information. It’s essential to determine how much you owe and what you can afford to pay. Although you may have little savings at the end of the month due to living expenses, the IRS has it’s own standard tables of personal living expenses. If your income exceeds these amounts, you have discretionary income, and the IRS expects you to be able to pay that amount per month.
  2. Take a holistic view of the situation. Review all options including bankruptcy and possible sources of financing. Review the statute of limitations and determine what programs under the Fresh Start Relief you qualify for. Sometimes it makes sense to do nothing if you’re close to the collections statute expiring.
  3. Discuss your options with you.
  4. Gather and submit the required information to the IRS.
  5. Remove and withdraw tax liens if qualified.

This process takes time and effort, both on your part and the attorney’s, but it is the only way to ensure success in resolving your tax debt.