Source: https://procedurallytaxing.com/category/lien/page/2/
Timestamp: 2019-04-20 18:35:02+00:00

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What happens when a spouse or other third party co-owns a house with someone who has a sizable federal tax liability? IRS seizures to satisfy an assessment are relatively rare. IRS attempts to enforce a lien and foreclose on a home are even rarer. And forced sales of homes when one of the co-owners of the house owes none of the taxes probably occurs only a handful of times a year.
We are in the process of reviewing cases and other developments that we have read over the past few months as we gear up to complete the last of the three updates we do annually for the Thomson Reuters treatise IRS Practice and Procedure. Earlier this year I read US v Tannenbaum, a case out of the Eastern District in New York where the IRS sought to enforce its lien and foreclose and sell upon a marital home in Brooklyn that was shared by the Tannenbaums, Sarah and Gershon. I flagged Tannenbaum for inclusion in our discussion of the government’s authority to force the sale of co-owned property under Section 7403.
Including interest and penalties Gershon unfortunately had run up a couple of million dollars in income tax liabilities. I am not sure if he filed MFS or if Sarah were relieved of the liabilities via Section 6015; the opinion is silent but Sarah was not on the hook for those assessments. Since 1977, the Tannenbaums jointly owned a house in Brooklyn that had an appraised value of over $1.2 million (a far cry from the Brooklyn home values when I was born and lived there in the days of Mayor Lindsay).
While the tax assessment only related to Gershon, both had some history with the government. In the mid 90’s both Sarah and Gershon had been indicted for conspiracy to defraud or commit an offense against the US and for false statements made to the IRS. Gershon pleaded guilty to the conspiracy charges and Sarah entered into a deferred prosecution agreement and all charges were dropped against her. Gershon had been sentenced to a year and a day and supervised release.
That background takes us to the case at hand and likely matters in terms of how the government approached this case. IRS sought to enforce the assessment against Gershon by foreclosing on and forcing the sale of their Brooklyn house. Both lived in the house, where they raised their children and also now lived with Sarah’s disabled mom. The house was specially set up to accommodate Sarah’s mom, who was in her 80’s and bound to a wheelchair.
This takes us to an issue that we discuss heavily in the Saltz/Book treatise, courtesy of Keith who has taken the lead oar as primary author on the revised collection chapters. Under Section 7403, a federal district court can “determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property,…, and a distribution of the proceeds of such sale according to the findings of the court.
The Tannebaum opinion applies these factors to the case at hand. While I will not discuss all the factors here, usually the most interesting part of these cases considers the prejudice to the non liable party if there is a forced sale. Of course, when the government comes in and kicks you out of your marital residence (and one that here was the marital home for close to 40 years) there is going to be prejudice.
What is too much in terms of prejudice? Sarah starts off at an atmospheric disadvantage because of her (and Gershon’s) prior history with the government. It did not help that Gershon’s mother had bequeathed a condo to Sarah and Gershon’s sister in what looks like an attempt to transfer assets outside the reach of creditors, including Uncle Sam. In addition, the opinion suggests that Sarah had other assets at her disposal and upon sale of the Brooklyn house, she would be entitled to about $600,000, as the government offered to split the sale proceeds of the Brooklyn house equally.
Those facts led the court to conclude that there was little prejudice to Sarah if the government would go ahead with the sale, as Sarah could find somewhere else to live.
Despite those facts that were stacked up against Sarah I did find one aspect of her prejudice argument to be interesting. She emphasized that in thinking about prejudice the court should “consider intangible factors” and “other common sense special circumstances.” In particular, Sarah noted that the forced sale would also impact her elderly and disabled mom, who lived with Gershon and Sarah in Brooklyn. She also pointed to the unique character of the neighborhood, which was predominantly Orthodox Jewish, as were the Tannenbaums. To top it off, she included in her papers an affidavit from a local real estate broker who noted that there was little market turnover in the neighborhood and that the house had additional value to elderly residents due to its proximity to a hospital.
The Court sympathizes with Sarah Tannenbaum concerning the care of her mother. But the evidence does not support Sarah Tannenbaum’s argument that she is short on resources. First, her financial resources are not limited to her salary, an amount that she has not disclosed.
Nonetheless, her share of the Condo sales proceeds, $350,000, plus the approximately $600,000 that she is anticipated to receive from the sale of the Home, mean that Sarah Tannenbaum will have $950,000 to lease or buy another home that can accommodate the Tannenbaums and Sarah Tannenbaum’s mother. Although neither side presented any evidence of the cost of leasing or buying an apartment or house in this neighborhood, the Court finds that $950,000 should suffice where the Tannenbaums can look for a smaller home, and the amount is not far off from the $1.2 million estimated market value of the Home. The Court is not aware of any controlling law, nor does Sarah Tannenbaum bring any to the Court’s attention, holding that a non-liable party is prejudiced if that party has to lease rather than buy a home.
The opinion noted that there were other Orthodox communities even if there were few alternates in the specific neighborhood. At the end of the day, however, while the court acknowledged the relevance of Sarah’s special circumstances, her resources were enough to tip that factor in favor of the government.
After applying all the Rodgers factors, the district court held that IRS had the right to force the sale of the Brooklyn house. Interestingly, the government argued that one of the factors in its favor was the prejudice to the government if it did not permit the forced sale. It is hard to force a sale of half a house, so there is always some prejudice if a court does not permit the sale of the entire property.
But there is more. Here the government pointed out that under NY law if Gershon were to die the US would not have the right to collect because its lien would be extinguished. Earlier this year and in fact prior to the court order setting the sale Gershon in fact did pass away (See Brooklyn, NY – Jewish Community Mourns The Sudden Loss Of Rabbi Gershon Tannenbaum ). The court was not aware of his passing when it wrote the opinion as the opinion noted Gershon failed to file any responsive papers. I suspect that the rabbi’s passing may then have extinguished the government’s interest in the residence, which would allow Sarah to remain in the house and give her the relief she sought. After the court issued its opinion, Sarah in fact filed a motion effectively asking the court seeking relief from a final judgment; the government has yet to respond and last week filed a motion seeking additional time to respond.
The recent bankruptcy case of Lewis v. IRS caught my eye for the number of procedural gears in motion. The focus of the case is on the impact of the release of the federal tax lien, but much more happens in the case and following the action plus, wondering why the IRS chose a certain path makes for an interesting discussion of what happens when the IRS makes a mistake and how it goes about correcting that mistake.
Mr. Lewis had a business installing water lines for the city of Haynesville, Alabama. Apparently, the city did not have its own public works department with the capacity to do this and it contracted with Mr. Lewis to get this done. In 2004, he installed enough water lines to earn $429,251.50. Unfortunately, Mr. Lewis did not have time to file a federal tax return for that year. The IRS prepared a substitute for return for him and issued a notice of deficiency. He defaulted on the notice of deficiency, allowing the IRS to assess. Based on the assessed liability, the IRS filed a notice of federal tax lien in 2010. This fact pattern repeats itself all too often and presents nothing unusual. Mr. Lewis has a case much like that of several clients of the Harvard Tax Clinic.
At almost the same time the IRS decided to file the notice of federal tax lien, Mr. Lewis “got religion” and decided to file his 2004 tax return. He did not get a whole lot of religion, however, because the Form 1040 that he sent to the IRS did not include the $429,251.50 he received for installing water lines and reported no income tax due. When I first read that he filed the Form 1040 after the SFR assessment, I thought that perhaps he was trying to set the year up for a discharge in bankruptcy; however, he would not leave off the income from the installation of water lines if bankruptcy drove the filing of this return. So, I cannot speculate why he filed this very late return and why he reported no tax liability on it. Nonetheless, the IRS processed the return and abated the liability assessed as a result of the SFR. The IRS routinely processes returns filed after SFRs and abates the SFR assessments down to the amount on the late filed return; however, the IRS usually gives some thought to the information reported on the SFR. Here, the IRS appears to have given no thought to the late return before abating the assessment based on the SFR.
The abatement of the assessment created a zero balance on the account which triggered the release of the notice of federal tax lien as well as the refund of some of the money the IRS has collected to that point. The following year, the IRS awoke from its slumber on this case and began an audit of the 2004 return that failed to report any of the money on the Form 1099 issued by the city. Not surprisingly, the IRS determined that he should have reported that amount and issued him a new notice of deficiency offering him what must have been at least his third chance to go to the Tax Court (the filing of the notice of federal tax lien would have given him a chance as well as the first notice of deficiency and I do not know if he also received a CDP notice for intent to levy though I would expect that he did.) Mr. Lewis again chose not to go to Tax Court and the IRS again assessed the tax. On January 23, 2015, the IRS filed a second notice of federal tax lien for 2004 and, I assume, gave him another CDP notice since this was a separate assessment.
Having the lien extinguished and having the liability extinguished are obviously not the same thing, and the Court walked through several cases making that point. I did not read all of those cases but suspect that few of them involved the fact pattern here in which the IRS actually went to the trouble to reassess the liability and file a new notice of federal tax lien. A footnote in the opinion states that the IRS briefed the issue of whether the lien release barred the IRS from issuing a second notice of deficiency but the Court found it did not need to reach that issue.
Because the IRS not only released the first lien but abated the assessment, I think the court reached the right result using the wrong analysis. The first lien no longer mattered by the time Mr. Lewis filed bankruptcy. The IRS might have tried to reverse the abatement – something it can do under the right circumstances – and revoke the release of the first lien but it did not. Instead, it used its authority to issue another notice of deficiency. The lien on which the IRS based its claim in the bankruptcy case had never been released. Unless the court found that the release of the first lien barred the IRS from taking any further action with respect to the tax year 2004, which is the argument advanced by Mr. Lewis, the court did not need to cite to the line of cases holding that the release of the tax lien only extinguishes the lien but not the underlying liability.
Sometimes, a mistake by the IRS prevents it from collecting the tax at issue. Here, it had several avenues to use to continue pursuing collection of the tax. It lost the priority position it held based on the original lien. Several years passed before it filed the second lien. The case does not provide enough facts to allow me to determine if other creditors benefited from the loss of the lien position. The case also does not provide enough details to make it clear whether the IRS will collect on the outstanding liability, but it is clear that the claim filed by the IRS will withstand a challenge simply trying to argue that a mistaken release bars the IRS from further collection for the year at issue.
On July 7 the Treasury Inspector General for Tax Administration (TIGTA) issued a report on the timeliness of the IRS in sending out notice to taxpayers and to their representatives after it files the notice of federal tax lien (NFTL). Section 6320, creating Collection Due Process (CDP) rights following the filing of the NFTL, requires that the IRS send notice of the filing of the NFTL within 5 business days after the filing of the NFTL. IRS procedures and seemingly Section 6304 require that notice of the NFTL also go to the taxpayer’s representative. If the IRS fails to send out the notice of the NFTL to the taxpayer who is the subject of the lien or to the taxpayer’s representative, the failure can have consequences to the taxpayer in the effort to pursue rights.
During the past year, I had two cases in which I represented taxpayers against whom the IRS filed an NFTL. In those cases, the notice of the filing was not sent to me until several days after it was mailed to the taxpayer. By the time I received the notice, 10 days or more of the 30 day period to request a CDP hearing had run. Because of my experience, I read the TIGTA report with interest. As discussed below, the Tax Court has held that the failure to notify the representative does not extend the time period within which the taxpayer must exercise their CDP rights. This makes the study of the IRS effectiveness in providing notice to representatives all the more important.
What happens when the representative does not receive a copy of the Notice of Deficiency and the taxpayer fails to timely petition the Tax Court? The failure to send the notice to the representative does not give the taxpayer a basis for getting into the Tax Court after the 90-window has closed, see McDonald v. Commissioner, Bond v. Commissioner (a CDP case refusing to allow taxpayers to raise the merits of a liability based on the failure of the IRS to send the statutory notice of deficiency to petitioner’s representative), Houghton v. Commissioner, and Allen v. Commissioner.
What happens when the representative does not receive a copy of the CDP notice? Unlike the Notice of Deficiency which deals with examination issues, the CDP notice concerns collection. In 2015, the Tax Court in Godfrey said the failure to provide notice to the authorized representative in a CDP case has the same consequences as the failure to provide notice when sending the notice of deficiency, which is to say that no consequences to the IRS result from that failure. We posted on Godfrey here, here, and here. Godfrey does not appear to have appealed the decision.
In a 2001 Chief Counsel Advisory opinion discussed in the Godfrey post, Chief Counsel’s office takes the position in footnote 7 that the 6320 (or 6330) notice must go to the taxpayer by statute and that Section 6304 prohibition on communication with the taxpayer without the consent of the representative does not does not alter that requirement. A more nuanced argument exists concerning the impact of using the IRS power of attorney form and whether the language of the POA form gives the Service additional rights.
The TIGTA report contains a chart of NFTL filings in the five year period running from 2011 through 2015. NFTLs have dropped by almost half during that period. The biggest drop resulted from the change in the threshold for filing as a result of the Fresh Start initiative from $5,000 to $10,000. That change is not hard and fast, as the IRS can file the NFTL at any dollar level and it is not required to file the NFTL at any dollar level; however, in general, IRS employees will follow the manual guidance to the extent they have the ability to work a case. The dropoff in the most recent years probably reflects some reduced enforcement action due to the reduced staff.
The TIGTA report on providing notice to taxpayers after the filing of the NFTL is one of a number of reports Congress required TIGTA to perform on an annual basis in the Restructuring and Reform Act of 1998 (RRA 98). TIGTA notes that over the past five years it has found that the IRS almost always complies with the requirement to provide timely notice to the taxpayer but has not always met internal guidelines with respect to practitioner notice. The report does not address the legal requirement provided in IRC 6304 concerning practitioner notice probably because of the Chief Counsel guidance that IRC 6304 does not create a requirement here.
The error rate for providing notice to authorized representatives in 2016 was consistent with the error rate over the past five years and shows that one in five notices of the filing of the NFTL does not get sent to the authorized representative despite internal guidance and a statute that specifically provide that the notice must be sent to the representative. TIGTA did not make any recommendations concerning the failure to notify authorized representatives this year because it had made them in the past and the IRS system for fixing the problem did not get implemented until after the sample period. TIGTA indicated that it would revisit the issue next year.
If you do not receive notice as a representative on any collection case in which you have a power of attorney on file with the IRS and have checked the box that you want copies of correspondence, then the IRS has failed to meet its statutory, not internal, requirement. We have posted about IRC 6304 before here, here, and here. Given the relatively high percentage of cases in which the IRS has not sent out the notice to the POA, a number of these cases should exist. TIGTA does not address the timeliness of sending out the copy of the notice to the representative. My impression from the report was the significantly delayed notices I received would count toward the 84% of the cases in which the IRS complied and were not measured by TIGTA as a form of IRS non-compliance. Yet, a significant delay when the taxpayer has only 30 days to act can have a significant influence on the outcome of a matter.
If you are concerned about receipt of the notice of the filing of an NFTL either by yourself as the representative or by your client, you may want to read this report and possibly some of the prior reports. If Congress is going to require TIGTA to provide us with this information, we should find ways to use it in situations in which the IRS fails to comply with the requirements. The failure to comply with notice requirements in collection cases may eventually lead to a different outcome than the failure to comply in examination cases. Godfrey may not be the final word in this litigation. IRC 6304 does not come with any directions about the remedy for failure to comply with its provisions and little litigation exists in the tax context. If you seek a remedy because of a violation of IRC 6304, you might look to litigation in the consumer debt collection area after which the statute is patterned.
The 9th Circuit recently sustained the district court which sustained the bankruptcy court in the case of Pitts v. United States. The taxpayer sought a determination that the taxes claimed against her in the bankruptcy proceeding were discharged. The courts determined that the taxes were not discharged, rejecting various arguments that she presented. The case breaks no new legal ground but serves to highlight how the IRS collects from general partners. If you have this issue, you might look at IRM Part 5, specifically 5.1.21, 5.17.7, and 5.19.14.
Ms. Pitts was the general partner of DIR Waterproofing. DIR failed to pay its employment taxes including both trust fund and non-trust fund portions. The IRS would typically make some effort to collect from the partnership and then seek to collect from the partners. The opinion does not describe the efforts made here, but the IRS did issue a notice of federal tax (NFTL) against Ms. Pitts. In these situations the IRS does not go through a separate assessment process for Ms. Pitts but uses the assessment made against the partnership in order to pursue collection against her. The NFTL would reference the partnership debt although it would make clear that the lien is against her. Because the debt arose through the partnership, she argued that it was a state law debt and the IRS was limited to collect as a state law creditor. The 9th Circuit made three separate explanations of why her arguments failed.
First, the court pointed out that under IRC 6321 Ms. Pitts was a person liable to pay any tax and, as such a person, a lien arises under federal law which attaches to all of her property and rights to property once the IRS makes demand for payment and payment is not made. This is federal law and not state law creating the lien. The court cited several cases in support of its position.
Next, the court found that the IRS can use all of its administrative enforcement tools because she is secondarily liable on this debt. The court cited to a Supreme Court decision, United States v. Galletti, 541 U.S. 114 (2004) that may have caused Ms. Pitts to make the arguments she made here but which should also have suggested to her that these arguments would likely fail. In Galletti, similarly situated taxpayers to Ms. Pitts went into bankruptcy where the IRS filed a proof of claim based on the assessment against the partnership in which they were general partners. The Gallettis argued that no debt existed against them because the IRS had not made an assessment against them (and the statute of limitations on assessment of the partnership debt had run by the time of the bankruptcy.) In that case, the bankruptcy court, the district court, and the 9th Circuit agreed with the Gallettis. These opinions relied upon the definition of ‘taxpayer’ in IRC 7701 and looked to the separate nature of the partners as taxpayers from the partnership. The IRS pushed the case to the Supreme Court, which held that the IRS did not need to make a separate assessment because the Gallettis were liable under state law as general partners of the partnership.
“Under a proper understanding of the function and nature of an assessment, it is clear that it is the tax that is assessed, not the taxpayer. See §6501(a) (“the amount of any tax … shall be assessed”); §6502(a) (“[w]here the assessment of any tax”). And in United States v. Updike, 281 U. S. 489 (1930), the Court, interpreting a predecessor to §6502, held that the limitations period resulting from a proper assessment governs “the extent of time for the enforcement of the tax liability,” id., at 495. In other words, the Court held that the statute of limitations attached to the debt as a whole. The basis of the liability in Updike was a tax imposed on the corporation, and the Court held that the same limitations period applied in a suit to collect the tax from the corporation as in a suit to collect the tax from the derivatively liable transferee. Id., at 494-496. See also United States v. Wright, 57 F. 3d 561, 563 (CA7 1995) (holding that, based on Updike‘s principle of “all-for-one, one-for-all,” the statute of limitations governs the debt as a whole).
Ms. Pitts wants the courts to recognize that the assessment only applies to her because of the operation of state law and since it is the operation of state law causing her to become liable she wants the debt treated as state law debt and not tax debt with the exceptions to discharge applicable to tax debts. The 9th Circuit, perhaps still remembering the Galletti outcome, does not allow her to split hairs in this manner. State law plays an important role in creating the liability but her liability is for a federal tax debt.
The 9th Circuit rejects her argument that state law creates the statute of limitations. It also rejects her argument that the continuation by the IRS of its efforts to collect this debt violates the discharge injunction. I did not go back and read the earlier opinions to see the age of the debt. The trust fund portion of the partnership’s unpaid employment taxes will always be excepted from discharge because B.C. 507(a)(1)(C) will always make this a priority debt in bankruptcy and that will always make it excepted from discharge under B.C. 523(a)(1)(A). The non-trust fund portion of the partnership employment tax debt should become dischargeable for bankruptcy petitions filed more than three years after the employment tax return due date, assuming it timely filed the returns. The court engages in no analysis of this issue making me think that she is not entitled to a discharge of the non-trust fund portion; however, depending on the timing of the debt and the bankruptcy petition, this portion of her debt could potentially be discharged in her bankruptcy just as in the bankruptcy of the partnership itself.
This case demonstrates how the IRS will proceed to collect from a general partner. It simply uses the assessment against the partnership to open the full range of administrative collection tools given to it under the Code. The effort by Ms. Pitts to use the Galletti opinion to argue that the operation of state law which lets the IRS go after the general partners without a separate assessment should also limit the IRS in its ability to collect. The 9th Circuit rejects that limitation on the power of the IRS in this situation and, I think, its decision is correct. The issue brings up in another context the interplay between state law which creates certain rights and obligations and the federal tax collection law which builds upon the state created rights and obligations.
US v Schwartz, a recent case out of a federal district court in South Carolina, highlights the question of whether parallel proceedings in state probate court should lead the district court to decline to exercise its jurisdiction under the Declaratory Judgment Act to resolve lien attachment and priority issues. It is an issue I had not considered before, and the opinion raises some questions which I am not sure how to answer. I will briefly summarize the facts and the reasons for the court’s decision to let a county probate court decide whether the US interests have priority over other creditors.
A quick summary of the facts will tee up the issue. The decedent Margaret Knapp died in 2008. At the time of her death Knapp owned two interests in South Carolina real properties, one of which as the linked obituary indicates she had moved into shortly before her death. Probate proceedings in Charleston County South Carolina commenced after she passed away.
a petition in the Charleston County Probate Court to invalidate a 2008 will executed by the decedent, reinstitute a 2006 will because of undue influence, and remove co-defendant Marc Knapp as personal representative of the estate; (2) an action in the South Carolina Court of Common Pleas for Charleston County to set aside a deed to unrelated property previously owned by the decedent; (3) a second action in the South Carolina Court of Common Pleas seeking partition of the unrelated property; and (4) the appointment of Schwartz [the defendant in the federal case] as special representative of the estate.
While the estate’s personal representative filed a Form 706, the estate tax due of over $400,000 was unpaid. IRS assessed the estate tax and made demand for payment. The decedent’s estate also filed 2007 and 2008 income tax returns on behalf of Knapp, also without payment of over $150,000 in tax. IRS also assessed and made demand for payment of the income tax. The estate and income taxes remained unpaid; to ensure priority of its interest the government filed notices of federal tax lien (NFTL) in the public records of Charleston County for both the income and estate taxes.
On the same day in 2016 that the US filed its NFTL, the estate’s personal representative Schwartz filed a Petition to Sell Real Estate and for Approval of Priority of Application of Proceeds in the Probate Court seeking an order allowing him to sell the South Carolina real properties free and clear of the United States’ tax liens.
Schwartz objected claiming that the district court did not have subject matter jurisdiction and also arguing that the state court should have jurisdiction under Colorado River Water Conservation District v US. Colorado River is a 1970’s Supreme Court case which provides the basis for one of the many federal abstention doctrines that govern when a federal court should decline to proceed even if it did have subject matter jurisdiction when there is a related state court proceeding. (As an aside, for those who share an interest in mundane civil procedure doctrines as well as tax procedure, a Shriver Center on Poverty Law manual has a nice description of the various federal abstention doctrines, including the Colorado River doctrine).
A declaratory judgment action “is appropriate ‘when the judgment will serve a useful purpose in clarifying and settling the legal relations in issue, and … when it will terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the proceeding.’” Poston , 88 F.3d at 256 (quoting Quarles, 92 F.2d at 325).
whether the federal action is mere procedural fencing, in the sense that the action is merely the product of forum-shopping.
The decedent’s estate has already been opened in the Charleston County Probate Court, and several issues related to the decedent’s estate have been and continue to be addressed in the South Carolina state court system. Resolving conflicting claims to a decedent’s estate is one of the primary functions of a probate court, and this Court has no doubt that the Charleston County Probate Court is the more suitable forum to handle the United States’ claim.
The opinion (and this post) barely scratch the surface when considering some of the knotty jurisdictional issues when there are state court proceedings that relate to in some ways federal tax assessments. I note that the factors discussed in Schwartz vary somewhat from the Colorado River doctrine, and while no expert in that area it seems they provide for more flexibility for federal courts to punt in deciding these priority issues while there is a related state court proceeding. This seems like a case more appropriate for federal court to decide, and one certainly that the government would want to make sure generally is resolved.
Keith was puzzled by this case, wondering why Justice did not simply remove the lien priority case to district court instead of bringing a declaratory judgment and injunction case, though he was unsure if there was something unique about probate cases but that generally the US has a right to remove cases to federal courts when it is a defendant. As Keith notes, this decision seems to leave to the state court the ability to make a determination regarding the priority of two federal tax liens. That is unusual and something the government never wants.
A recent article suggests that credit agencies are preparing to reduce the hit on a credit score that the notice of federal tax lien (NFTL) creates. You can find other articles here and here. I have written about withdrawal of the notice of federal tax lien previously.
This is good news for taxpayers where the IRS has filed the notice of federal tax lien. I do not know if the change will have much impact on the value of the lien to the IRS in bringing in revenue. The change seems unlikely to impact revenue to the IRS and may simply represent a great consumer victory for taxpayers. Another possible outcome is that because the NFTL no longer hurts taxpayers as much, the IRS may feel it can return to its pre–Fresh Start days and file the NFTL at lower dollar levels. I think that would be a mistake for reasons I discussed in an article several years ago and am not suggesting that the IRS contemplates doing that, but one of the reasons for pulling back on the number of lien filings, among many others, was the damage to taxpayer’s credit ratings and balance between that and the benefit to the IRS.
The issue that has long puzzled me regarding the NFTL and the credit reporting agencies concerns their willingness to boost a credit score when the taxpayer gets the lien withdrawn but not when the taxpayer gets the lien released. The National Taxpayer Advocate has written on this subject several times (see here, here, and here), as have others (see here and here), and the NTA has worked hard to get the IRS to be more generous in withdrawing the NFTL. Local taxpayer advocates regularly work with taxpayers to obtain lien withdrawals. I understand why removing the notice of federal tax lien through withdrawal provides some boost to a taxpayer which could or should get reflected in their credit score but having the NFTL released provides a far more positive outcome to the taxpayer generally since it reflects the end of the federal tax lien. Yet, credit agencies have not embraced the release as a trigger point for upgrading someone’s credit score.
Withdrawal of the NFTL simply removes the notice of the lien and the benefits to the IRS provided by defeating the four parties enumerated in IRC § 6323(a) but it does not eliminate the lien itself. The taxpayer still owes the money. The unfiled federal tax lien continues to attach to all of their property and rights to property. The fact that the NFTL was on file still provides creditors notice that the taxpayer has outstanding tax debts and should make creditor wary. The IRS can still levy or offset or file suit. All withdrawal does is remove the debt from the public eye, but credit agencies embraced it as a reason for improving the taxpayer’s credit score.
Until lien withdrawal went into the Code 20 years ago, the IRS had no way to pull back an NFTL once it was filed. There can be many good reasons to pull back the NFTL and the statute provides flexibility to the IRS to deal with those situations. The withdrawal provision received more attention than I thought it deserved because of the credit reporting agencies decision to boost scores upon lien withdrawal. That decision, which seems to make little sense, caused the National Taxpayer Advocate and others to push for lien withdrawals in many cases not contemplated by Congress when the withdrawal provision came into existence. I applaud the NTA and others for helping taxpayers but it always seemed to me that the action was driven by a misguided view of the benefits of withdrawal on the part of the credit reporting agencies.
Congress has also passed sections requiring the IRS to release the NFTL quickly and provided some minor remedies when it does not do so. One aspect of lien release that may cause credit agencies to ignore it as an important event may stem from the way release occurs. Starting in the ealy 1980s, the IRS began filing self releasing liens. Almost all, if not all, NFTLs contain this self releasing feature. That can make it difficult to know when the release has actually occurred since you must read the NFTL to know when it releases. Unlike mortgages which get formally released with the filing of a document or a margin release clearly indicating the release of the mortgage, NFTLs that release because of the passage of time have nothing that clearly signals the release has occurred. Credit reporting agencies may avoid making decisions on releases because it requires a little bit of work to discover when it occurs as opposed to lien obligations terminated with a specific document.
I like to focus more on release because that is where the taxpayer receives a tangible benefit. The release signals the end of the liability. That is something to celebrate and something that deserves attention from the credit reporting agencies. I hope that as the credit reporting agencies pay attention to the NFTL and how it should impact a credit score, they will focus on the importance of release and recognize that importance with a credit boost at that point. Their old rules caused taxpayers and their representatives to spend a fair amount of time chasing the goal of a withdrawal rather than keeping their eyes on the real prize of release. Focusing on how to obtain a release, rather than a withdrawal, would benefit taxpayers more and deserves more recognition.

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