Thursday, February 17, 2011
The IRS has the plenary power to file a “”Notice of Federal Tax Lien” (NFTL) tax lien in the public records on a taxpayer if there is “any tax” liability . The IRS Internal Revenue Manual requires the filing of a tax lien for tax assessment balances of $5,000 or more and states that the tax lien should filed even if the tax balance is less than $5,000 if the filing of the tax lien will promote payment compliance . The tax lien will not be released until the tax debt is paid or otherwise discharged. The NFTL has severe negative economic consequences on individual and business taxpayers often initially and long after any tax obligation is resolved. The IRS files a NFTL in the public records. Most businesses cannot function profitably if they cannot get credit. When requests are made for credit, lenders always check the most recent credit scores. I have seen lenders immediately withdraw funds from account receivable factor lending, and I have seen credit denied. Customers also do credit checks from suppliers, and then shop for a different supplier without the implied risk from a supplier with a risk of going out of business. It is very difficult for any business to remain a viable business after their credit reports reflect IRS tax liens. When the businesses close, jobs are lost, and taxable revenue is lost. All of the U.S. credit agencies record tax liens in their credit reports, and that tax lien remains in place under the tax debt is discharged. Even if the IRS tax lien has a short life, the credit agencies will still keep that tax lien in their credit reports for seven (7) years after the IRS releases its tax lien. For this reason IRS tax liens are a long term economic disaster for individual and business taxpayers. At the present time, credit reports are instantly available and they are commonly referenced for most commercial and employment practices. It is not unusual for a business to have a tax debt at the end of its tax year that it cannot fully pay at the time the tax return is filed. The failure to full pay a tax debt by any individual or business is common. There is a lack for funds because of a natural disaster, the loss of a large customer, an economic recession or reduced business revenue for an endless array of reasons. Yet the IRS will file a credit-destructive and business-destructive tax lien even if the taxpayer agrees to fully pay the outstanding tax liability with interest and penalties in an Installment Agreement, documenting the financial ability to fully pay that tax liability. The result of a tax lien, and the resulting loss of credit, results in business failures, job losses, and a loss of tax revenue from the income that is foregone from the failure of the business. The federal loss is exasperated because those who lose jobs must survive on federal and local assistance provisions for the unemployed. In this chain reaction of events, creditors of the business reduce profit with even a greater loss of tax revenue collected by Treasury. Consequently, the capricious and mechanical filing of tax liens under current IRS administrative practices cause irreparable economic harm, especially in situations where the business taxpayers have the ability to make payments on their tax debt. In the case of individual taxpayers who have received IRS tax liens, the loss of credit impacts negatively on their ability to get employment and housing. Employers and landlords commonly take into account IRS tax liens identified in credit reports. This credit impairment means that the individual taxpayer will less likely to buy a car, a home and other items that stimulate economic activity and grow taxable business income. The counterproductive policy of the IRS for filing tax liens is one haplessly ignored by the IRS and Treasury. Obviously, there are reasons that justify a tax lien filed in the public records. A tax lien gives the IRS a secured priority interest against other unsecured creditors. It has been my experience that the IRS Revenue Officers do not balance the benefit of a tax lien against the economic harm the lien causes on all individual and business taxpayers. There are taxpayers and businesses with no serious assets (e.g., no real estate with more than nominal equity). There may be businesses that are just service businesses, yet the IRS will still file a tax lien even in these cases where there are no assets to give the IRS a secured creditor preference. In these circumstances, the tax lien only serves the purpose of destroying the credit of the business and the individual taxpayers. Tax liens filed in these circumstances are frivolous, punitive and imprudent. In some cases, the filing of a tax lien, when it will obviously cause irreparable harm, is malicious. Any IRS revenue officer has the unencumbered statutory authority to file a tax lien on any individual or business even if the taxpayer has agreed to pay the tax debt quickly. The strong tax policy of Congress is to encourage taxpayer to repay their tax debt at the earliest possible time. When the full amount of the tax debt cannot be paid, taxpayers are authorized to pay their tax debt in an Installment Agreement. The IRS will normally not agree to allow a taxpayer to enter into an Installment Agreement without agreeing to the filing of a tax lien in the public records. An Installment Agreements reflects good tax policy for the collection of a taxpayer’s tax debt because it is a voluntary commitment by a taxpayer to pay his tax debt. Upon receiving this offer by a taxpayer to pay the outstanding tax debt, the IRS will agree to the negotiated payment plan and then punish that taxpayer with a tax lien that destroys the taxpayer’s credit. The tax lien is perverse in this situation because bad credit reduces the ability of the taxpayer to make installment payments and fully pay the outstanding tax debt. These tax liens are required even in cases with the taxpayer does not have property that could be seized in any kind of an enforced collection action; in these cases a security interest in property owned by the taxpayer is meaningless. It is not unusual for a taxpayer to have a new tax debt and then agree to pay that tax liability in a short term Installment Agreement. The advantage of an Installment Agreement protects the taxpayer from any enforced collection action . Obviously, legislation is needed to prevent capricious tax liens particularly when taking into account the severe economic damage caused by tax liens. This is just one item that could be considered by this Committee in justifying fundamental tax reform. The National Taxpayer Advocate (NTA) has made no attempt to get the IRS and Treasury to change the Internal Revenue Manual to eliminate mandatory tax liens where there is a tax debt of $5,000 or more. However, it is my opinion that the NTA has the power and authority to use Taxpayer Assistance Orders to stop the filing of capricious and counterproductive tax liens . The $5,000 standard for mandatory tax liens is contrary to law. The authority of the IRS to file tax liens in the public records is discretionary. Congress made that authority discretionary. Section 6321 which provides: 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. The language drafted by Congress under § 6321 crates an unperfected lien, and not one that requires that the tax lien be perfected by a filing of the tax lien in the public records. The statute does not require the IRS to file the notice of lien in the public records. When the IRS created a mandatory filing of tax liens in the public records in its Manual, it converted a discretionary power to a mandatory rule that is in conflict with the intent of Congress. If Congress wanted to write a mandatory lien statute, requiring that unperfected tax liens be fired in the public records, that would be an easy addition to § 6321. The IRS mandatory tax lien policy is direct conflict with the intent of Congress under § 6321 to make the public-record filing of tax liens discretionary. One of the reasons for identifying IRS tax lien abuse is that it helps support the intent of this Committee to revisit the Internal Revenue Code to see what makes sense and issues that not only do not make sense, they are distortions in the administration of tax law by the IRS. IRS abuse of § 6323(j)(1) authorizing the withdrawal of tax liens Section § 6323(j)(1) of the Code provides discretionary authority to the IRS to withdraw a tax lien for the withdrawal of a tax lien in certain: if the filing was premature and not in accordance with IRS administrative procedures; if the taxpayer has entered into an installment agreement under section 6159; if the withdrawal of the notice of lien will facilitate the collection of the tax liability; or, with the consent of the taxpayer or the National Taxpayer Advocate, with withdrawal of such notice would be in the best interests of the taxpayer (as determined by the National Advocate) and the United States. If tax liens are withdrawn from the public records, the result would be the same as if the tax liens were never issued and the tax liens will be expunged from the credit reports. Withdrawn tax liens restore credit buy may come too late to restore a business that has closed as the consequence of a tax lien. It is anomalous that § 6323(j) provides statutory standards to withdraw a tax lien, but IRS revenue officers file economically destructive tax liens on businesses and individuals that eliminate or substantially reduce IRS collection potential. At a minimum, the standard that permits the withdrawal of a tax lien under § 6323(j) should apply as a statutory threshold before the IRS has the authority to file a tax lien. I view this as a legislative drafting error. It makes no sense for Congress to draft a statutory standard to have a tax lien withdrawn, but no statutory standard for file a notice of tax lien in the public records. This is an additional argument that supports my observation that the IRS has misused its authority to file tax liens in the public records. The standards in this statute are quite clear, yet the IRS rarely will use its authority to withdraw a tax lien when the facts are within the standards of § 6323(j). In all of years I have practiced tax law and have seen all forms of documented economic hardship resulting from tax liens. Neither the IRS nor the National Taxpayer Advocate support tax lien withdrawal applications even where severe economic hardship is documented. Generally, applications for tax lien withdrawal are granted only in cases where the tax liability was assessed by the IRS in error. It is my experience that the IRS will not withdraw a tax lien even if: the tax lien will result in employment discharge; employment is available only with lien withdrawal; or only if it is the only way a person can get work as a contractor. In short, the IRS and the NTA do not follow the statutory standards of § 6323(j) where there is a mutual benefit to the IRS and the taxpayer and it will allow the taxpayer to generate taxable income sufficient to repay the person’s tax debt. Here again is one more example of an IRS and the NTA, ignoring ignores the intent of Congress under the clear language of a tax statute.