BASICS OF COLLECTION The pendulum has swung back. I. R. S. is back in the collection business to levels close to pre RRA 98 Delinquent taxpayers are pouring into offices all across the nation.. The following information indicates the level of non-compliance around the nation. Although the information is over a year old, there is no indication that there has been a significant change in the tax gap. A taxpayer delinquent account is an account with money due; a taxpayer delinquent inquiry is where the taxpayer may need to file a tax return. One is a non-payer, the other is a non-filer. Provided by the Transactional Records Access Clearinghouse (TRAC) of Syracuse University. Collection Review 1 Patti Logan, EA
THE COLLECTION PROCESS Collection begins with notices. When a return is filed that is not fully paid, a series of notices is sent to the taxpayer s last known address. CP 14 - The initial notice of payment due. This notice satisfies the requirements of notice and demand. Failure to fully pay the tax, penalties and interest on this notice creates the statutory lien. CP 501 - Reminder of unpaid tax. This notice is not required and collection can be accelerated past this notice and the next. CP 503 - Urgent - Payment is required CP504 Notice of Intent to Levy. (Final Notice of Intent to Levy) Formerly, this notice was all that was required before a levy could be issued. It may be the last notice required before a Federal Tax Lien is filed since the lien notice of due process is given only after a lien is filed. Letter 1058 (LT 11) - (Notice of Intent To Levy and Right Of Hearing) Originally, this letter was issued by revenue officers when a 504 was not issued prior to the case going to the field or if the last 504 notice was years ago. Now the letter is issued by ACS and RO s as the first step in enforcement action giving the taxpayer notice of his right to request a due process hearing. Collection Update 2010 2 Patti Logan, EA
WHERE DOES YOUR COLLECTION WORK BEGIN? The authority to grant installment agreements has been extended to other functions outside of Collections within the Service improving one-stop service, reducing taxpayer burden, encouraging voluntary compliance and utilizing resources more effectively. The functions are: Appeals, Employee Plans and Exempt Organizations, Examination, Taxpayer Advocate, Submission Processing, and Customer Service. Multi-functional installment agreement authority is limited to certain types of accounts with an aggregate unpaid balance of assessments less than or equal to $100,000, with streamlined procedures for accounts with an aggregate unpaid balance of assessments less than or equal to $25,000. (Unofficially, the author has been informed that Customer Service may grant installment agreements that fully pay the tax penalty and interest within 5 years as long as the aggregate balance due is less than $50,000.) This authority is limited to: Individual accounts, Corporate accounts in which the only open periods are Form 1120 modules, and Out of business sole proprietor accounts. There are several areas available initially to settle the client s situation. Each has its benefits and drawbacks. CUSTOMER SERVICE Although Customer Service has limited authority, if you can get the account settled in this organizational unit, often no Notice Of Federal Tax Lien is filed. That can be very beneficial to your client. PRACTITIONER PRIORITY SERVICE 866-860-4259 Practitioner Priority Service is the practitioners own customer service. They can handle simple collection cases, abatement of some penalties, requests for installment agreements as long as the dollar amount is not too great. The taxpayer stands a chance of getting the installment agreement without having a lien filed when dealing with PPS. TAXPAYER ADVOCATE SERVICE TAS has been delegated authority to accept: Collection Update 2010 3 Patti Logan, EA
1. Streamlined installment agreements 2. Non-streamlined agreements up to $100,000 3. Guaranteed installment agreements 4. In-Business trust fund express agreements up to $10,000 Although TAS has the authority to enter into the types of agreements noted above, you have to meet the criteria to have the case accepted by them. ACS (AUTOMATED COLLECTION SYSTEM) Although you may be able to negotiate some cases before the account goes to collection, much of our collection work starts with the telephone unit, the Automated Collection System. ACS was designed to be a paperless system. Like other such systems, there is still paper but much is automated. Once accounts are on the system, assistors call the taxpayers with the intent of collecting information and either getting full payment of the account or setting up an installment agreement. Each evening, an extract of the Automated Collection System (ACS) databases is downloaded to the Predictive Dialing System. The systems administrator generates predefined campaign types (types of cases to be called based on the extract from the ACS system) to be worked that day. The predictive dialer dials the taxpayer s phone number. If the taxpayer answers the phone, the call is sent to an ACS employee to work that case. At the same time the call is delivered, the ACS employee is sent a screen with the extract data so that they can identify that the correct individual or business has been contacted. The predictive dialer marks that record to indicate that the taxpayer has been contacted so the PDS will not call the taxpayer again during that campaign. The employee works that case in the ACS System real time just as he/she would any other ACS call. If there is no answer or if there is a busy signal, answering machine, bad telephone number/signal, or the taxpayer hangs up, the predictive dialer records that information and schedules the case for a follow-up call. At the end of the day, the predictive dialer uploads all of these nonproductive calls to the ACS computer. Although cases assigned to ACS were once limited to those under $100,000, IRS opened the Buffalo ACS to handle those cases exceeding that amount. Generally, the Buffalo office is taken a much harsher position on settling cases than even revenue officers. They are demanding pay stubs, bank statements and other supporting documentation before determining the expenses they will allow. This is a far cry from a paperless system. Collection Update 2010 4 Patti Logan, EA
ACS is also set up to contact neighbors and employers. They can send out levies and liens with the touch of a button. So, the account in ACS is not to be taken lightly. Note: Lately, ACS is sending out levies on accounts outside their authority. When the representative calls to negotiate the account as a result of the levy, they are told that ACS does not have the authority to release the levy and that the account must go to a revenue officer which will take at least 6 weeks. TAX EXAMINERS (TE) In a recent memo 1, the Director over Collection Policy expanded the cases to be worked by TEs. Cases assigned should meet the following criteria: Grade 09 cases Individual Masterfile (IMF) with an unpaid balance of assessment below $25,000 Non-trust fund business cases with an unpaid balance of assessment below $25,000 Business masterfile (BMF) cases involving a sole proprietorship with an unpaid balance of assessment below $25,000 Delinquent returns o Individual returns o Non trust fund business returns Cases with low or medium risk codes No cases involving trust fund recovery penalties, LLCs or with a potentially dangerous taxpayer designation or a caution upon contact indicator. Although the TE is allowed to work cases with non-filers, they are not required to make a field contact. If they can not determine an appropriate liability from internal data or data received by on-line, phone or through the mail, or through a telephonic or in-office interview, the case may be returned to the queue. When reporting a case as currently uncollectible, TEs are no longer limited by the criteria of IRM 5.16.1.1(10). These restrictions were based on aggregate unpaid balances however these restrictions are now limited by those shown above. Basically TE s are limited to in-office casework on those cases which meet the criteria shown above. If inability to pay cannot be verified through available on-line resources, telephone, or correspondence, the case will be returned to the queue. Collection Update 2010 5 Patti Logan, EA
TE s may grant an In-business Express Installment Agreement (IBTF) since no field call is required. REVENUE OFFICERS (RO) Just as the most skilled of IRS examination staff is the revenue agent, the most skilled of the collection organization is the revenue officer. They have months of training to handle the most technical collection tools. Revenue officers are considered field employees. Many work part of the time from their home. This can make telephone contact difficult for the representative. If a case either does not qualify for ACS or cannot be resolved because of lack of taxpayer response to ACS calls and letters, the case goes into a queue. When a revenue officer (RO) group manager needs more work, they call cases out of this queue. The RO s priority is the in-business taxpayer, one who has employees and owes 941 taxes. These are pulled from the queue first. However, various individual accounts also meet the selection criteria and may be pulled to be worked as well. Revenue officers, once out of training, have the authority, often with managerial approval to initiate any type of collection action not requiring court action. They can make installment agreements, report accounts as uncollectible, refer the case for suit, seize assets, file liens and refer cases to Criminal Investigation or to the Examination function. The difficult part of working with the revenue officer is the amount of discretion they have. A good revenue officer is generally easy to deal with and applies the law, regulations and policies fairly. BUT, there are too many who have attitudes that are difficult with which to work. In those cases, Congress has granted the taxpayer the right to take the case to a group manager and even Appeals. COLLECTION TOOLS NOTICE OF FEDERAL TAX LIEN Internal Revenue Code 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. Only three requirements must be met before the lien arises: Collection Update 2010 6 Patti Logan, EA
1. An assessment must be made. 2. Demand for payment must be made. 3. The taxpayer must fail to make payment. The lien that is created is a silent or secret lien because its existence is known only by the taxpayer and the IRS. The Federal Tax Lien will continue until the liability is satisfied or becomes unenforceable by lapse of time. The silent, statutory lien is sufficient to encumber the assets. However, it does not actually transfer a taxpayer s property to the government. The administrative procedure used to convert the taxpayer s equity to the Government s equity is the levy/seizure. A seizure is generally a levy of property from a taxpayer and a levy is taking property from a third party such as a bank or employer. FEDERAL TAX LIEN - The lien that is created by 6321 is the statutory lien. It attaches to everything the taxpayer now owns or ever will own during the life of the lien. There are certain exceptions. Exempt Property - Even though a lien has been filed it will not be valid against any purchaser, holder or a security interest, mechanic s lien or judgment lien creditor until notice has been given. There are other items that are considered Super-priorities where a lien will not be valid. The exemptions can be found in the Internal Revenue Code at 6334. Notice of Federal Tax Lien - A Notice of Federal Tax Lien has the effect of notifying other creditors that the Government is owed taxes. The reason for filing the notice of lien is to establish the Government s place in line of creditors and thus secure the taxpayer s equity so that other creditors cannot move up in position before the Government. Although it also has the effect of damaging credit, that is not the Government s reason for filing the notice. When the lien is filed, the taxpayer is mailed a copy of the notice by IRS. However, when the lien is released, the address on it may be so old that it is no longer good and often the taxpayer never receives a copy. There are commercial records searching firms that will provide a copy for a fee. Usually that fee is nominal. If a lien is released while a representative is working on the case, if at all possible, a copy should be requested. In order to get an immediate release, payment must be made in cash or certified funds. Generally, revenue officers and assistors are reluctant to accept cash so certified funds or money orders are recommended. Arrangements can be made ahead of time that the proper funds are brought in and a release is exchanged for the certified funds. In this case, the taxpayer is generally required to file the release at the appropriate place. Place of filing - The actual notice must be filed as set out in state law. Most states follow the UCC (Uniform Commercial Code.) Real property is deemed to be situated in its physical location and personal property both tangible and Collection Update 2010 7 Patti Logan, EA
intangible is considered to be located at the residence of the taxpayer at the time the notice of lien is filed. The residence of a corporation or partnership is considered to be the place where the principal executive office of the business is located and the residence of a taxpayer whose residence is outside the United States shall be deemed to the in the District of Columbia. Collection Update 2010 8 Patti Logan, EA
Actions Required after Filing The federal tax lien is so powerful that in July 1998 through the Restructuring and Reform Act Congress granted taxpayers the right to have a court hear their objections to the filing of a lien against their property. Within five days of filing the notice of lien, code section 6320(2)(2) requires that written notice be given including the amount of unpaid tax, the taxpayer s right to hearing. This is a major change in the Government s collection philosophy. When notice is received, the taxpayer has 30 days from the end of the 5 day period after the filing of the federal tax lien to request a hearing. It would shorten the period a little but may be easier to compute 30 days from the date of the notice to request an appeal s hearing. The request can be based on a question of the validity of the underlying tax, whether the lien should be filed based on hardship or hindering the taxpayer s ability to make payment or any relevant issue relating to the unpaid tax. The taxpayer may also raise the issues that the basic requirements of the law have not been performed; no notice or demand. As long as the issue has not been raised at another Collection Due Process (CDP) hearing, it can be raised. If a taxpayer is given proper notice of a deficiency or proposed assessment and does not take advantage of the opportunity to appeal the proposal through the Collection Appeal Process, he cannot take advantage of the CDP hearing to go to court. Form 12153 is provided to request a Collection Appeal but is not required. The request must be mailed to the address shown on the letter where the lien was generated. Just as with a petition to tax court, there is no extension to the 30 days. A verbal extension by the party issuing the notice is not an acceptable extension. Only the taxpayer may waive the 30 days but in doing so would lose their right to a due process hearing on that tax period. FILING A LIEN Collection employees have been trained to protect the government s interest by filing a lien. Procedures for filing the lien are simple. The person assigned the case must make a determination whether or not to file the lien. The IRM notes that the determination generally should be made upon first contact. This gives the taxpayer the opportunity to pay the tax or explain why it is not owed. If the determination is made to file the lien, then the decision is noted in the IRS computer. The filing is generally automated once the determination is noted. However, a determination not to file a lien must be noted in the case file. It is rare that a taxpayer can convince the IRS to not file a lien. According to Nina Olson s (National Taxpayer Advocate) 2010 report Tax Filing Season Update: Current Issues Before The Committee On Finance, United States Senate IRS has increased its lien filing by 475 percent from fiscal year 1999 to 2009. However, IRS has failed to keep track of the monies brought in Collection Update 2010 9 Patti Logan, EA
from filing these liens. IRS has long held that lien filing is one of the largest income producers from delinquent returns however with no solid numbers, this claim could not be substantiated. So, Olson s team conducted their own, high level research to find whether lien filing is actually an effective revenue tool. Her report noted that Taking into account that nearly 52 percent of payments cannot be classified, only about $169 million out of about $905 million collected was clearly attributable to lien filings with respect to 2002 delinquent tax liabilities. Olson pointed out that the IRS has established a set of business rules which generally require a lien to be filed even though economically, this makes little sense. Olson noted that for the taxpayer who has been reported a currently uncollectible due to hardship: Refund offsets account for nearly $6 out of every $10 in tax payments collected from these taxpayers. Notice of federal tax liens were responsible for only $2 out of every $10 collected from the taxpayers. WHEN THE TAS WILL ADVOCATE FOR NON-FILING OF THE LIEN Olson has issued a memorandum to her caseworker with guidance on recommending the non-filing of liens in certain situations. 2 Some of the issues they are to evaluate are: Compliance History. Has the taxpayer had prior balances due? If so, how recently? Would the NFTL filing jeopardize the taxpayer s ability to comply with the tax laws in the future? The fact that a taxpayer has never had a delinquent tax account before or has not had a delinquent account in recent years should weigh significantly in favor of refraining from filing an NFTL. Reasons for noncompliance. Is the taxpayer s noncompliance attributable to a one-time unusual or catastrophic event, such as a heart attack, hurricane, or a loss of job? Are there extenuating circumstances that may contribute to the noncompliance? The following situations are examples of such extenuating circumstances: after a stroke, the taxpayer fell behind in estimated tax payments, or after the loss of a job, the taxpayer incurred a ten percent penalty for early withdrawal from an IRA. In such situations, where the taxpayer has been historically compliant except for a one-time catastrophic event, filing of an NFTL will harm the taxpayer s ability to repay his or her tax liability and remain compliant in the future. Collection Update 2010 10 Patti Logan, EA
Hamper Collection. Will the filing of an NFTL hamper the collection of tax? If not filing the NFTL will significantly impair the IRS s ability to collect the tax, this factor should weigh in favor of filing an NFTL. Undue Harm to the Taxpayer that Reduces Collection Potential. Consider whether the filing of the NFTL will harm the taxpayer s financial viability, thus reducing collection potential, i.e., the filing prevents the taxpayer from obtaining or retaining employment or obtaining the financing necessary for a business taxpayer to remain in business. If the filing of the NFTL unduly harms the taxpayer and reduces collection potential, this factor should weigh in favor of refraining from filing an NFTL. Payment before the Collection Statute Expiration Date (CSED). Will the proposed Installment Agreement fully pay the taxpayer s balances owed prior to the expiration of the CSED? If the taxpayer can pay in installments before the CSED, this factor will weigh in support of a determination not to file an NFTL. CERTIFICATES RELATING TO LIENS There are a number of certificates that relate to the lien. The distinctions between the certificates are: Release operates to completely extinguish the lien, Discharge removes certain property from the effect of a tax lien, Subordination relegates our lien to a lower priority position, Non-attachment denotes that a person of like or similar name is not, in fact, the taxpayer. Revocation issued when a lien was erroneously or improvidently released or in connection with a breached collateral agreement with an offer in compromise. CERTIFICATE OF DISCHARGE The most common type of certificate prepared is the Discharge of Federal Tax Lien. The "discharge" of property from a Federal Tax Lien removes certain specifically described realty or personal property from the effect of the lien. The lien continues in full force and effect on all other property or rights to property of the taxpayer. Form 668B is issued. (See Exhibit page 33.) Types of discharges are: IRC 6325(b)(1) bases the discharge on the fact that property of the taxpayer remaining has a fair market value double the sum of the amount of the federal tax liability secured by the FTL and any encumbrances senior to the lien. If there are mortgages, state and/or local taxes, Collection Update 2010 11 Patti Logan, EA
mechanics liens, etc, the amount of these debts would be added to the amount of the tax liability and multiplied by two. Example: Tax Liability: $15,500 Other debts + 23,334 $38,834 X 2 $77,668 The property remaining subject to the lien must be at least $77,668 IRC 6325(b)(2)(A) bases the discharge on partial satisfaction of the liability determined to be not less than the value of the government s interest in the property. To qualify the taxpayer must be divested of all interest in the property. For example, if the IRS has a lien totaling $203,000 and with the o Property selling for: $215,000 o Less senior encumbrances 135,000 o Less proposed settlement costs 15,000 o The IRS lien interest equals: $ 65,000 After IRS receives the $65,000 in partial satisfaction of the debt, the taxpayer will owe $138,000. IRC 6325(b)(2)(B) bases the discharge on evidence that the property of the taxpayer has no value to the government. In this case the debts to the senior lien holders are greater than the fair market value of the property. IRC 6325(b)(3) bases the discharge an agreement with the IRS allowing the property to be sold. Per an escrow agreement, sale proceeds are held subject to the claims of the US in the same manner and in the same priority the claims has prior to the sale. For example, if there are two mortgages senior to the IRS tax lien totaling $32,000 and $5,000. The government s interest in the property is $40,000 and there are liens on the property junior to the IRS lien in the amount of $3,000, $12,000 and $2,990. The proceeds from the sale would be dispensed by paying the debts in the following sequence: a) $32,000 b) 5,000 c) 40,000 d) 3,000 e) 12,000 f) 2,990 Collection Update 2010 12 Patti Logan, EA
IRC 6325(b)(4) IRC 6325(b)(4) bases the discharge on the third party s right to substitute the value of the property in cash or an acceptable bond to cover the government s interest in the property. IRC 63285(c) is a discharge of property subject to an Estate Tax Lien. This type of application for discharge required a Form 4422. REQUESTING A DISCHARGE In June 2010, IRS released a new form a new instructions for requesting an discharge. Most of the form is self-explanatory. However one problem is the appraisal required to be submitted along with the application. The new instructions establish that one professional appraisal is required plus one of the following additional valuations: County valuation of the property (real property) Informal valuation of property by a disinterested third party. Proposed selling price for property being sold at auction Other valuations that have been accepted are disinterested broker comparison and contract for sale. Other information that should be included with the discharge application: Include a Form 8821 (Tax Information Authority) of Form 2848 (Power of attorney) for all parties needing to receive information. This could include the lender, the preparer of the application, the title company escrow agent. A copy of the trial closing statement (HUD-1) Copies of the FTL if available. Copy of the proposed sales contract or purchase agreement. Copy of the title report or a list of encumbrances senior to the FTL. Escrow agreement if applying under IRC 6325(b)(3). The application with attachments should be submitted to the Advisory Group Manager. See Publication 4235 for addresses. In Austin it is: 300 E 8th St.., MS 5021 AUS Austin, TX 78701 RELOCATION ALLOWANCE If the discharge is issued under 6325(b)(2) or 6325(b)(2)(B) and if the sale is of the principal residence, the taxpayer may be eligible for a relocation expense allowance because of an inability to pay. Any amount approved will be deducted from the sale proceeds and will not reduce the taxpayer s delinquent tax liability. Collection Update 2010 13 Patti Logan, EA
This allowance is based upon an inability to pay relocation expenses and is subject to limitations. To apply for the allowance, the taxpayer should complete and submit Form 12451, Request for Relocation Expense Allowance with the application for discharge. Per the IRM 3, supporting documentation may consist of: Proposed rental agreement Estimates from moving companies Truck rental estimates Utility hook-ups, etc The IRS reviewer will make a determination as to whether the taxpayer has sufficient funds available to pay reasonable relocation expenses, Information such as financial statements, recent bank statements, and last return filed can be used in this determination. Generally, cases in hardship (CNC) status do not require another hardship determination. The relocation allows is subject to the National Standards for the new residence locale and family size times a factor of 2.5. In a memorandum dated October 4, 2010 4, IRS issued interim guidance for processing and approving request for certificates of discharge in short sale situations. A short sale is one where the senior lien holder agrees to accept less than the total amount owed as satisfaction for its lien claim. For example, if a mortgage company has a claim on the property for $500,000 but due to a decline in the property value, the bank agrees to accept $300,000 in satisfaction of its note. Because the senior lien holder s mortgage attaches to all the equity in the property, the lien interest of the United States is the short sale property is valueless. Therefore applications for discharge in short sale situations should be issued under IRC 6325(b)(2)(B). In some situations, the senior lien holder may negotiate the payment of expenses to be taken out of its settlement costs which might be greater than the normal closing costs that the IRS would approve. They may include creditors that have a junior position to the FTL. Since the action by the senior lien holder actually decreases the amount they will get, it does not carve out a place for the IRS to receive funds provided there is no fraudulence involved. For example, a mortgage company may allow $5,000 to be paid for homeowner association fees which is junior to the IRS. Because the payments made to the HOA are made from proceeds attributable to the bank s priority lien interest and the interest of the IRS in the property is valueless, the IRS cannot make payment of any part of the amount going to the HOA as a condition of the discharge. Collection Update 2010 14 Patti Logan, EA
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What is the most difficult type of discharge? A business is the most difficult in my experience because there are so many variables and there rarely are any professionals easily available to make appraisals. Additional time should be included when pricing this type of discharge. Practice Tip - If the client is willing to sell an asset, they will get more money to apply against their tax bill than if I R S seizes and sells it. On personal property sold, a discharge is not always necessary. The revenue officer can agree to levy the proceeds of the sale so that the property is no longer an asset of the taxpayer's. This may work with small single items but you may want to get a discharge on record for a business or something large. SUBORDINATION Subordination is a collection technique. IRC 6325(d) authorizes IRS to issue certificates subordinating a tax lien to another interest when the amount paid to the Internal Revenue Service is equal to the amount subordinated. When a lender is willing to give the taxpayer money that will allow either an increase in the value of the property or make it easier to sell, IRS is willing to let the new lien have priority even though it was not filed first. In the first example, since the tax lien is being subordinated only to the extent the United States receives, on a dollar-for-dollar basis, an equivalent amount, the Government interest cannot in any event be injured and a new procedure for collecting taxes is made available. Giving the Government more flexibility with the lien is intended to increase the ability to collect. For example, funds may be borrowed to increase the value of the property subject to the tax lien. This may occur, for example, in the case of a crop which needs harvesting and without which the tax lien has little or no value. It is intended that this authority will be used under conditions similar to those under which an ordinarily prudent business person would subordinate his/her rights in a debtor's property in order to secure additional long run benefits. Practice Tip - It is difficult to find any business to lend money when IRS is still a creditor. One example when this is possible is if the lender is already the senior lien holder and lending the money will allow the taxpayer to sell the property to an existing buyer rather than have to foreclose in a tight market. IRS has issued a new form, 14135, Application for Certificate of Subordination of Federal Tax Lien (Rev. 6-2010). Collection Update 2010 18 Patti Logan, EA
CERTIFICATE OF NON-ATTACHMENT We may be seeing more certificates of non-attachment if IRS ever starts churning out the innocent spouse applications. This certificate is used when there has been confusion, such as similarity in names, resulting in the appearance that a Notice of Federal Tax Lien has been filed against that person. It will also apply to applications submitted by innocent spouse. Once the determination is made that the lien does appear to attach, the Service is required to issue a Certificate of Non-attachment of Federal Tax Lien certifying that the property of an individual is free from a NFTL. IRC 6325(e) codifies the administrative practice of issuing certificates that the property of an individual is not subject to a tax lien. The use of the form by being made a part of the Internal Revenue Code has a legal status and can be filed in the same office where a notice of lien is filed. The certificate is conclusive that the lien of the Government does not attach to the property referred to in the certificate. The certificate may be revoked in the same manner as a Certificate of Release of Lien. For instructions on preparing the request for a Certificate of Non-Attachment see Publication 1024. REVOCATION IRC 6325(f)(2) provides that where a release has been improvidently or erroneously issued, revocation of the certificate and reinstatement of the tax lien may be made by mailing notice of the revocation to the taxpayer at his/her last known address and by filing notice of the revocation of the certificate in the same place where the original notice of lien was filed (if such notice of lien had been filed). The effective date of reinstatement will be the date the notice of revocation is mailed to the taxpayer but not before the date of the filing of the notice of revocation when it is canceling a Notice of Federal Tax lien previously filed. The reinstated lien will have the same force and effect as a general tax lien which arises upon assessment of the tax. (IRC 6321). The reinstated lien will not have a life longer that the collection statute expiration date of the underlying assessment. The reinstated lien will not be valid against any holder of a lien or interest described in IRC 6323(a) (any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor) until the notice has been filed in accordance with the provision of IRC 6323(f) subsequent to the time the reinstated lien becomes effective. What does that mean? The reinstated lien will not affect someone who is buying the property subject to the lien, has a security interest (like a factor), a Collection Update 2010 19 Patti Logan, EA
mechanic s lien or a judgment lien creditor until the lien is properly filed according to state law or the creditor is given actual knowledge of the revocation. Actual knowledge is usually achieved by an RO delivering a copy of the lien or revocation directly to the creditor. RELEASE OF LIEN A Notice of Federal Tax Lien is self-releasing. That means that once the statute of limitations for collection has expired, the lien automatically releases. However, the lien may be released at other times. Before the Service can issue a Certificate of Release, the taxpayer must meet certain specified conditions. IRC 6325(a); Treas. Reg. 301.6325-1. A Certificate of Release of the federal tax lien is authorized under each of the following three conditions: The amount assessed (plus interest) is paid. The amount assessed becomes legally unenforceable by reason of lapse of time. A bond is furnished satisfactory in terms and sufficient in amount to secure the payment of the outstanding assessments plus interest. If either of the first two conditions is met, a Certificate of Release must be issued. The IRS may exercise discretion, substitute the bond for the lien, and issue a Certificate of Release for the third condition. Pursuant to the regulations, a tax lien must be released as soon as practicable, but not later than 30 days, after the IRS has determined that the liability has been fully satisfied, has become legally unenforceable or for which a bond conditioned upon the payment of the liability has been accepted. Issuance of a Certificate of Release is also required not later than 30 days of a taxpayer's request made after December 31, 1986, if the liability is satisfied or has become unenforceable. The Certificate of Release is conclusive that the tax lien referred to in the certificate is extinguished. Practice Tip: Even though the lien is self-releasing credit bureaus often require a paper release. When a taxpayer is hurt by a self-released lien, the IRS will prepare a paper release. WITHDRAWAL OF LIEN Do not confuse a lien release with a withdrawal. There is an important distinction between "releasing" a federal tax lien and "withdrawing" a filed notice of that lien. The release of a federal tax lien extinguishes not only the lien itself, but also automatically extinguishes the underlying liability. IRC 6325(a). Sometimes, however, circumstances arise where it is in the best interest of the government to withdraw the NFTL without extinguishing the underlying liability. The Service has Collection Update 2010 20 Patti Logan, EA
authority to "withdraw" a notice of federal tax lien, in certain circumstances. IRC 6323(j). The withdrawal of the NFTL only withdraws public notice of the lien; it does not extinguish the underlying liability, nor does it release the underlying federal tax lien. In her April 15, 2010 written statement regarding the 2010 Tax Filing Season Update: Current Issues Before the Committee on Finance, United states Senate, Nina Olson, the National Taxpayer Advocate, addressed the lack of use of withdrawal of a lien by the IRS. In one case cited in her report she told about a stock broker who was unable to get a job because of the presence of a lien. Even though he had paid all of the tax and only had small penalty and interest amounts still owing, IRS refuse to withdraw the lien. Olson was fighting that determination citing the benefit to the IRS if the taxpayer had a job, was able then to pay the accruals as well as have income for future tax obligations. In a memo from Office of Chief Counsel 5, IRS was advised that a lien could be withdrawn after the tax has been paid and the lien has been released. Counsel noted that it can be in the taxpayer s as well as the IRS s best interest to withdraw a lien in this case. Obviously the taxpayer benefits with a higher credit score and no lien on record but the government benefits as well in a general sense, withdrawal can be said to be in the United States best interest insofar as the improvement in the taxpayer s credit history assists him with future tax compliance. It was also mentioned that the presence of the released lien on the taxpayer's credit report no longer benefits the government. Although this information has been dispersed within the IRS, certain areas are more open to this change in philosophy. When a representative encounters a rejection of an application for withdrawal in circumstances such as the above, the local Taxpayer Advocate Service should be contacted for assistance. In her 2011 Report to Congress Olson noted that for the 9 months since the issuance of the Chief Counsel s opinion, the IRS has failed to changes its policies regarding withdrawal of the lien after the lien has been released. In response to a TAD (Taxpayer Advocate Directive) the IRS has committed to draft interim guidance to implement the opinion by the middle of July 2010. OLSON S RECOMMENDATIONS Several recommendations were made in Olson s report: Rescinding IRS directions to file a NFTL on a currently not collectible hardship account; Require managerial approval for NFTL filings in all cases where the taxpayer has no assets; Collection Update 2010 21 Patti Logan, EA
Issue interim guidance requiring IRS contact employees to base the determination whether or not to file the NFTL on specific taxpayer information such as equity in assets, whether the lien will attach to property, will it benefit the government or will it jeopardize the taxpayer s ability to comply with the tax laws in the future; and Develop and issue guidance allowing, upon request of the taxpayer the withdrawal of an NFTL where the statutory withdrawal criteria are satisfied even if the underlying lien has been released. Allow taxpayers to appeal the filing of a NFTL before the lien is filed; Provide for civil damages for improper NFTL filing or failure to make the required NFTL determination and Allow a taxpayer to bring action for improper lien filing or failure to make the required NFTL determination; and Amend Section 605(a)(3) of the Fair Credit Reporting Act 6 to address the length of time that information about an IRS NFTL filing remains on a taxpayer s credit report after the release, withdrawal, or expiration of the NFTL or the underlying tax debt. In Olson s 2011 Objectives Report to Congress, she noted that the IRS has declined so far to implement the recommendations and is continuing to automatically file lien, causing harm to the taxpayer. She has issued two Taxpayer Advocate Directives (TADs) on January 20, 2010 directing the Commissioner, Wage and Investment (W&I) Division and Commissioner, Small Business/Self-Employed Division, to: Immediately discontinue the automatic filing of NFTLs on Curretly Not Collectible hardship accounts with an unpaid balance of $5,000 or more, require employees to make NFTL filing determinations based on a meaningful review of the facts in all cases where the taxpayer has no assets; Allow, upon the request of a taxpayer, the withdrawal of an NFTL in situations where one of the statutory withdrawal criteria is satisfied, even if the underlying lien has been released; Include the complete TAS training video, Taxpayer s Rights, Collection Case Studies, in the mandatory annual continuing professional education (CPE) training about exercising judgment and discretion before and after NFTL filing for collection employees and managers in the Collection Field function; and In consultation with TAS, develop a separate training on this topic for employees and managers in the Automated Collection System (ACS). Collection Update 2010 22 Patti Logan, EA
The TAD has been appealed to the Deputy Commissioner for Services and Enforcement. The gist of the issue is that the IRS believes that more studies are necessary before making fundamental changes to the lien policies and procedures. The National Taxpayer Advocate believes that indeed more studies are necessary but in the meantime, her studies have demonstrated that current lien filing policies and practices actively and unnecessarily harm taxpayers, particularly those taxpayers who are being reported currently uncollectible. She believes that there is no sound policy or revenue basis to automatically filing liens. The TAD is being elevated to the Commissioner of Internal Revenue Service. In the last few months, the National Taxpayer Advocate, Area Directors and Local Taxpayer Advocates issued a total of 12 Taxpayer Assistance Orders under IRC 7811 involving lien issues where a taxpayer is being harmed by the IRS s collection and NFTL practices. LEVY ON TAXPAYER S ASSETS The federal tax lien secures the Government s interests in a taxpayer s property but it does not take action to bring in any cash to the coffers. As an immediate step to take possession of the taxpayer s assets, the IRS uses levies. Without going to court IRS can take tangible, intangible personal or real property. A levy can seize a taxpayer s asset from the taxpayer or from a third party such as a bank or employer. There is no legal distinction between a levy and a seizure. Generally, a notice of levy is used to take a taxpayer s property held by someone else. A Form 668W is a levy against wages, salary or other income. This form allows the taxpayer exemptions for dependents. A Form 668A is a levy that is used to attach to other assets such as bank accounts, rent payments or other funds held by a third party. A 668B is the form used to levy/seize non-cash assets from the taxpayer or third parties. If the taxpayer holds the property, seizure procedures are used. If a third party holds an asset that can not be paid over by writing a check the seizure procedures are also used. NOTICE REQUIREMENTS: As with a lien, there are only three prerequisites to using a levy. According to IRC 6331 the IRS must give a taxpayer: 1. Notice and demand 2. A notice of intention to levy, and 3. A notice of a right to a due process hearing. The notice of intention to levy is now considered enforcement action when issued by ACS or a revenue officer. This is the notice that gives the taxpayer their right Collection Update 2010 23 Patti Logan, EA
to a due process hearing. The notice (Letter 1058) must be given to the taxpayer in person, left at the taxpayer s home or business or sent to the taxpayer s last known address by certified or registered mail. The taxpayer has 30 days from the date of the notice to request a collection due process hearing. When counting the 30 day period, the date that the notice is mailed or given to the taxpayer is not counted. The revenue officer must wait the 30 days plus an additional 15 days for mail processing before a levy can be served 7. In the past, the notice sent by the service center, CP 504 was the legally required notice. Thirty days after that notice, a levy could be served. When a revenue officer received a case and wanted to levy if the computer showed that a CP 504 has been issued, a levy could be immediately issued. Since January 19, 1999 The Restructure and Reform Act of 1998 requires that the Notice of Your Right to a Hearing must be mailed. At the current time, rather than issue the notice automatically and generate millions of requests for hearing, the IRS has decided to issue the notice only when a levy is going to be served. However, as mentioned above, IRS is considering changing that philosophy. Notice of the Right of a Hearing must be sent to the taxpayer s last known address and if it is known that the taxpayer has a representative, a copy must also be sent to them. If it is found that the notice was not sent to the last known address, the levy must be released and a new notice issued. The taxpayer s copy must be sent by certified mail but the IRM allows the representatives copy to be mailed by regular mail. EMPLOYMENT TAX (DISQUALIFIED EMPLOYMENT TAX LEVIES) Although most taxpayers given notice and a right to a hearing and even the right to petition tax court before the IRS can levy on each tax period that they owe, Congress has taken a tough stand on employment taxes that are not paid. The law was changed to exempt from notice any person who has requested a CDP hearing within the most recent 2 years before the beginning of the taxable period included in the current levy. The look-back period is measured from the beginning of the disqualified employment tax levy period. For example: The taxpayer requests a CDP hearing for Form 941 for the quarter ending 12/31/2007, and then the taxpayer accrues additional taxes for the QE 6/30/2008. The additional quarter qualifies as a DETL levy because the taxpayer requested a prior levy hearing for a quarter that ended (12/31/2007) within the two-year look back period (4/1/2006 though 4/1/2008.) If the period currently being collected qualifies as a DETL, then a letter 1058-D, Notice of Levy and Notice of Your Right to Hearing, is sent to the taxpayer along with their copy of the levy. Collection Update 2010 24 Patti Logan, EA
FEDERAL CONTRACTORS The Small Business Jobs Act of 2010 (H.R. 5297) was signed into law September 27, 2010. One of the changes was to exempt the IRS from sending federal contractors a Notice of Intent To Levy and Notice of Right Of Hearing (Letter 1058) prior to levying federal payments owed to them. In the past, before making a payment to a contractor, their information was run against a database of delinquent taxpayers. If a match was found, the contractor would be sent a CDP notice. Unfortunately, the contractors were paid based on their contracts. The new law allows IRS to issue levies prior to a CDP hearing on Federal tax liabilities of Federal contractors. The contractor is then afforded the opportunity to appeal the levy. LEVY WHEN TAXPAYER HAS NOT FILED ALL RETURNS AND HAS AN ECONOMIC HARDSHIP Vinatieri v. Commisisoner, 133 T.D.No. 6 (December 21, 2009) was an important case. The Tax Court held that if, during a CDP levy hearing, the taxpayer establishes that the proposed levy will create an economic hardship, the IRS CANNOT take levy action even if the taxpayer has not filed all required tax returns. Representatives have all met the circumstance where we have proven to the IRS that a hardship situation exists but we are told that they cannot put the account in CNC status until all returns are filed. We are then given a warning of enforcement action, a levy along with a deadline to file the returns. In this case, Ms. Vinatieri provided financial information with substantiation that she could not pay the taxes without causing an economic hardship. Although the Appeals officer agreed, he noted that he could not place Vinatieri in CNC status because all return were not filed and issued a determination letter to that effect. IRC 6343(a)(1)(D) states that a levy shall be released if the Secretary has determined that such levy is creating an economic hardship due to the financial condition of the taxpayer. Treasury Regulation 301.6343-1(b)(4), defines economic hardship as when: The levy is creating an economic hardship due to the financial condition of an individual taxpayer. This condition applies if satisfaction of the levy in whole or in part will cause an individual taxpayer to be unable to pay his or her reasonable basic living expenses. The determination of a reasonable amount for basic living expenses will be made by the director and will vary according to the unique circumstances of the individual taxpayer. The judge ruled A determination in a hardship case to proceed with a levy that must immediately be released is unreasonable and undermines public confidence that tax laws are being administered fairly..in a IRC section 6330 prelevy hearing, if the taxpayer has provided information that establishes the Collection Update 2010 25 Patti Logan, EA
proposed levy will create an economic hardship, the settlement officer cannot go forward with the levy and must consider an alternative. The National Taxpayer Advocate has provided guidance for her caseworkers when the IRS refused to apply Vinatieri. 8 The IRS has promised to make changes to the IRM implementing procedures consistent with Vinatieri. COLLECTION STATUTE OF LIMITATIONS Although an in-depth discussion is outside the parameters of this presentation, a cursory review is in order. The statute of limitations for collection as defined by IRC 6501 is ten years from the date of assessment. Once the ten year elapses IRS can no longer take action to collect any taxes due. Thirty days after the statute expires, any lien filed will self-release. Several events can stop (toll) the running of the time on the statute or extend the statute: BANKRUPTCY - The filing of a bankruptcy petition automatically stops the statute of limitations and extends it for the time in bankruptcy plus 6 months. WAIVER - A Form 900 is a consent to extend the statute of limitations on collections. The current policy is to allow the statute to be voluntarily extended a maximum of five years plus one year for technical adjustment when entering a new installment agreement if the extension allows a tax to be fully paid by the agreement. However, this tool is to be used very infrequently. OIC - An offer in compromise form 656 (Rev 7-2004) has been changed to extended the statute only the amount of time that the offer is being worked or in appeals plus 30 days. It no longer extends the statute an additional one year past the time it takes to be worked. DUE PROCESS - Submission of a request for Collection Due Process hearing extends the statute. APPLICATION FOR TAXPAYER ASSISTANCE ORDER - Submission of a Form 911 ATAO extends the statute. LEAVING THE COUNTRY FOR SIX MONTHS OR MORE - The statute of limitations is extended for the period of time that a person is out of the country when returning there is six months or less remaining on the statute. SUIT TO REDUCE A TAX CLAIM TO JUDGMENT - A revenue officer can recommend to district counsel that a federal tax lien be reduced to judgment. The judgment is controlled by state law but in most states it extends the statute and additional 10 years and can be re-filed at that time extending it another 10 years. Since the taxpayer can no longer be coerced into signing a 900 waiver, IRS is advising RO to recommend suits on a more frequent basis. Previously extended statutes no longer run to the end of the time indicated on the Collection Update 2010 26 Patti Logan, EA