The IRS’s collection efforts can impact different taxpayers differently.
While the IRS has broad collection powers, there are some taxpayers who are largely immune from the IRS’s collection efforts. This varied impact is partly due to the range of collection tools Congress has provided to the IRS.
The IRS lien notice provides an example. Many taxpayers could care less if the IRS files a lien notice. The lien notice is just a filing in the public records. In and of itself, it does not mean the taxpayer will end up paying anything to the IRS. The IRS has to bring a suit in court to enforce the lien notice–which it hardly ever does.
The IRS lien notice can be devastating for other taxpayers. It can prevent them from earning a living, engaging in certain transactions, borrowing money, and more. The recent Kelly v. Commissioner, T.C. Memo. 2022-73, case provides an example of this. It addresses the rules for removing IRS liens when doing so facilitates the collection of tax.
Facts & Procedural History
The taxpayer was a securities broker in New York. For the years at issue in this case, he earned over $1 million each year.
The taxpayer filed his tax returns late and, with penalties, he ended up owing $2.5 million in back taxes. The facts in the case suggest that the late returns and payment were due to a divorce proceeding.
When the taxes were not paid, the IRS issued a Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing. The taxpayer filed a timely request for a collection due process hearing in response to the IRS’s Lien Notice.
At the IRS appeals hearing, the taxpayer asked for an installment agreement to pay the taxes and for the IRS to withdraw its lien notice.
The court summarized the taxpayer’s position on the lien as follows:
Petitioner also urged that the NFTL filings be withdrawn. He told SO2 that these filings would be reported to the Central Registration Depository, a database maintained by the Financial Industry Regulatory Authority. Petitioner asserted that the NFTL filings would place a “mark” on his securities license, which might adversely affect his business and result in “significant hardship.”
The IRS followed its procedures for these hearings and denied both of the taxpayer’s requests which led to the current tax litigation.
About the IRS’s Lien Notice
We have addressed the IRS’s liens on this website several times. Here are a few examples:
- IRS tax lien on trust property
- Defective deeds & the IRS tax lien
- Unperfected loans & IRS tax liens
- Transferring Property to a Spouse & IRS Tax Liens
As explained in those articles, the IRS generally has a lien on all of the taxpayer’s property if there are unpaid taxes assessed against the taxpayer. The IRS’s lien arises as of the date the taxes were due.
This so-called secret lien by the IRS can become public if the IRS files a lien notice in the public records. The IRS lien notice is usually filed with the county clerk’s office in the county that the taxpayer resides in or has property in. The IRS may also file its lien notice with the state Secretary of State for the state in which the taxpayer resides.
Once the lien notice is filed, there are several consequences. One is that the third parties who pay fair market value cannot obtain a clear title to the taxpayer’s property by buying the property from the taxpayer. This consequence isn’t an issue in this court case. This court case focuses on the other consequence, namely, that third parties may see the lien notice and decide not to transact business with the taxpayer.
Congress provided the IRS the ability to impose these liens, but it also imposed restrictions. Congress also imposed guidelines that fall short of being real restrictions on the IRS and how it handles liens.
Withdrawing the Lien Facilitates Collection
Section 6323(j) is an example of this. It says, in part, that:
The Secretary may withdraw a notice of a lien filed under this section and this chapter shall be applied as if the withdrawn notice had not been filed, if the Secretary determines that—
(C)the withdrawal of such notice will facilitate the collection of the tax liability.
The taxpayer cited this language:
During the CDP hearing petitioner asserted that the NFTL filings had been reported to certain securities regulators and placed a “mark” on his business. This allegedly could “caus[e] investors to not do business with petitioner,” possibly resulting in “a loss of business and income” and rendering him less able to pay his tax debt.
The taxpayer’s argument has some merit. The court case did not get into the regulatory scheme, but investment advisors generally do have to disclose their debts. This is true of those who work under broker-dealers and are subject to FINRA and registered investment advisors who are governed by the SEC and/or state investment authorities. The investment advisors also have to make these disclosures public and, in many cases, provide the disclosures to new and existing clients.
These regulators can and do penalize investment advisors for willfully failing to disclose IRS debts. This disclosure is usually required regardless of whether the IRS files its lien or not. The regulations generally require disclosure even without an IRS lien notice being filed. The court did not need to address this as the court noted that the taxpayer’s argument was speculative. There was no evidence presented to the court that the taxpayer had actually lost business.
Other professionals have similar rules, some of which may or may not require disclosure. Insurance agents are an example. And those who own businesses that do business with the Federal or state governments may also be tripped up by an IRS lien notice. Those who have businesses that rely on financing or bank loans may also find that the IRS lien notice results in their access to bank loans drying up or being called due.
What Evidence is Needed?
This court case confirms that the IRS usually cannot be forced to withdraw its lien notice. This is a decision that is within the IRS’s discretion. This is consistent with prior court cases.
The Kyereme v. Commissioner, T.C. Memo. 2012-174, court case is an example. The taxpayer in that court case retired due to health issues and had tax from a retirement account distribution. He had to borrow money to support himself and argued that the IRS lien notice would result in him being forced into public assistance as the IRS lien impacted his ability to borrow. The court did not even require the IRS to lift the IRS lien in this other court case. It also based its decision on the lack of evidence.
Given these court cases, one may need direct evidence to trigger Sec. 6323(j). What evidence is sufficient isn’t clear. For example, would a letter from the investment advisor’s broker-dealer stating that his employment would be terminated if the IRS lien notice is not lifted? Or could something less be offered, such as proof of earnings before and after the lien notice filing? Or maybe even correspondence from prospective clients who said they did not want to do business with the investment advisor given the IRS lien notice?
The IRS lien notice can have a devastating impact on some taxpayers. This is particularly true for those who have licenses or businesses that can suffer financially due to the lien. These taxpayers should carefully consider their regulatory disclosure rules and circumstances and gather sufficient evidence to support a request to lift their IRS liens. Given the lack of guidance as to what evidence is sufficient, this is an area where creativity and persuasion, in addition to knowledge of IRS procedure, can help.
The regulatory reporting rules aside, this is a real issue. An IRS lien
The question in this case is a real one.
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