The Extended Process Makes Fighting a Tax Lien Easier
Sometimes, it seems like a federal tax lien comes unexpectedly, like a thief in the night. In fact, most people do not know that the IRS files a statutory lien almost immediately and without notice, so the Service has the legal authority to collect the delinquent tax. But since this lien is not public, it has no effect on a credit score or other adverse financial impact. What most people do not know, however, is that a federal tax lien is actually an extended process and involves three stages.
Back to the public tax lien notice. There is actually a lot of stuff that must happen before the lien becomes final, and in almost every stage, there is a way of fighting a tax lien.
According to the Internal Revenue Manual, field contact, which means a conversation with the taxpayer, is the preferred method. However, agents almost always skip this step and send letters to the taxpayer’s last known address. While such efforts technically satisfy the notice requirement, they also raise some interesting questions.
- What if the taxpayer’s second language is English? Many people can speak a foreign language fairly well, but have trouble understanding writings, especially ones that throw around words like “lien” and “delinquency.”
- People move so often that there is a very good chance that the address on the most-recently filed 1040, which is nearly always the last known address, is no longer valid. That’s especially true if the taxpayer hasn’t filed a return lately.
The IRS files a lien not to harm the taxpayer but to collect money. Inadequate contact efforts partially defeat that purpose and cast a shadow over the whole process.
Any adverse action, including a tax lien, must “balance the need for efficient collection of the tax with legitimate concerns of the taxpayer that actions be no more intrusive than necessary.” In plain English that means that any negative action, like a tax lien, must carry out means that effectively collect the owed government tax, while still keeping the taxpayer in mind and making sure that those actions are not too intrusive. So, the IRS uses a wide range of factors at this stage, including amount owed, compliance history, and the likelihood of repayment. In some cases, such as installment agreement defaults, this process is more streamlined, and in other cases, such as failure to pay certain Affordable Care Act money, the Service may not file a lien at all.
Extension, DNF, and Deferral
Mostly because of internal issues that have little to do with fighting a tax lien, the IRS may extend the time between the notice and the filing, but DNF (Do Not File) is a very useful tool. Common Do Not File situations include:
- Taxpayer in Bankruptcy: Using the B-word is often an effective way of fighting a tax lien. The IRS can still collect against bankrupt individuals, but the process is usually more time consuming. IRS agents, like most of us, like to do things the easy way when possible.
- “Genuine Doubt” as to Liability: Payments made through partners are not credited immediately. Furthermore, since data security is a real problem at the IRS, there is almost always at least some doubt as to liability. That gives an attorney an opening in terms of fighting a tax lien.
- Preliminary Agreement: Remember, the IRS just wants the money. If an attorney begins such a process, the agent may not file the lien.
A deferal is also appropriate if “filing the NFTL will hamper collection.” In terms of fighting a tax lien, this is the big one. Since a federal tax lien has roughly the same effect on a credit score as a foreclosure or bankruptcy, the lien makes it almost impossible to borrow money. Many times, if the individual cannot borrow, the individual cannot pay. A lien definitely torpedoes real estate sales in most cases. Alternatively, if the taxpayer is a business, a lien usually kills state funding for nonprofits and cripples cash flow in many for-profit businesses.
In all these cases, the agent must have “reasonably certainty” that “deferral will both facilitate collection and be in the best interest of the government and the public.”