I. Introduction

Internal Revenue Service (“IRS”) bank account levies and wage garnishments count among the scariest tax collection weapons in the U.S. Treasury arsenal. However, the Notice of Federal Tax Lien (“NFTL”) can, in many cases, pose a more immediate and substantial threat to individuals and businesses with outstanding tax liabilities.

In January 2018, the IRS began to revise much of its internal policies and procedures to clarify guidance related to the filing of an NFTL. Because the determination to file an NFTL can be made relatively early in the tax collection process, it is important that tax practitioners review the revised guidance and engage the IRS quickly before an NFTL is filed.

II. The Statutory Federal Tax Lien

Code Sec. 6321 states that “[i]f 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.” Therefore, the Federal Tax Lien arises when:

• An assessment has been made;
• Notice and demand for payment has been made; and
• The taxpayer has neglected or refused to pay. [1]

When these three requirements are met, the Federal Tax Lien arises without any further action by the IRS and it attaches to a taxpayer’s current and future property and rights to property for the amount of the liability.[2]

Under Code Sec. 6322, the Federal Tax Lien is effective from the date the assessment was made and, therefore, the lien date is deemed to relate back to the assessment date.[3] The Federal Tax Lien continues until the liability for the amount assessed is satisfied or becomes unenforceable as a matter of law (e.g., expiration of the collection statute expiration date (CSED)).

III. The Notice of Federal Tax Lien

If the Federal Tax Lien already exists, then why does the IRS file the NFTL? The Federal Tax Lien is not valid against the following four types of creditors until the IRS properly files the NFTL[4]:

1. Purchasers for value;
2. Security interest holders;
3. Mechanic’s lien holders; and
4. Judgment lien creditors.[5]

It is important to note that, even if an NFTL has been filed, some classes of creditors still enjoy priority.[6] The interests held by these creditors are commonly referred to as “superpriorities.” However, in-depth discussion of lien priorities is outside the scope of this column and, therefore, will not be discussed herein.

Once filed, the NFTL becomes a matter of public record and can have a negative effect on a taxpayer’s credit, ability to secure a loan, and ability to sell or transfer property. If a taxpayer is under contract to sell a house, for example, then the NFTL could impact negotiations, delay settlement, or even kill the deal entirely. Because the NFTL is public, its filing can also affect the taxpayer’s personal or business reputation.

IV. NFTL Pre-Filing Considerations

Arguably, Code Sec. 6320 “requires the IRS to insure collection actions, including the decision to file an NFTL, balance the need for the efficient collection of the tax with legitimate concerns of the taxpayer that actions be no more intrusive than necessary.”[7] In this regard, the Internal Revenue Manual (“IRM”) provides considerations to be used when determining whether to file an NFTL.[8] The pre-filing considerations include:

A. Taxpayer compliance;

B.Taxpayer qualification for a determination exception (e.g., Guaranteed/Streamlined Installment Agreements or In-Business Trust Fund Installment Agreements);

C. Protection of the government’s interest, including exigent circumstances; where the filing of an NFTL is necessary to protect those interests; and

D.Taxpayer qualification for a determination that an NFTL filing will hamper collection.[9]

The above list is not exhaustive, and Revenue Officers are instructed to take these factors, as well as the IRM as a whole, into consideration when making their determination.[10]

A. Taxpayer Compliance

The IRS considers a taxpayer’s history of compliance with federal tax laws when determining whether to file an NFTL and will generally verify whether the taxpayer is in compliance with tax filing and tax payment requirements for the current tax year. Clearly, if a taxpayer has a bad history of compliance, then this factor will not be in the taxpayer’s favor. However, if the opposite is true, then tax practitioners should highlight this fact as evidence that an NFTL filing is not necessary to encourage the taxpayer to become compliant. Moreover, a good history of tax compliance may indicate that the issue giving rise to the unpaid liability is an isolated occurrence that does not necessitate the filing of an NFTL.

B. Taxpayer Qualification for Determination Exception

IRM pt. 5.19.4.5.1.1[11] sets forth the determination requirement exceptions. For example, “[a]n NFTL filing determination is not required” if a taxpayer is able to enter into “Guaranteed/Streamlined Installment Agreements or In-Business Trust Fund Express Agreements.”

C. Protection of the Government’s Interest

The Collection function may consider whether an NFTL filing is necessary to protect the priority of the government’s interests against competing lien interests, specifically the four classes of creditors described above. On the other hand, if the taxpayer has sufficient equity in assets to satisfy the liability in full, a tax practitioner may point out that protection of the government’s interest is unnecessary as payment arrangements can be made to resolve the liability.

D. Taxpayer Qualification for a Determination that an NFTL Filing Will Hamper Collection

If a taxpayer is working with a lender to obtain financing to pay the liability, then an NFTL filing can hamper collection. Taxpayers should document their efforts to obtain financing to show the IRS that they are working toward obtaining the funds to pay the liability and that an NFTL filing will foreclose their ability to ultimately succeed.

V. Attempting to Prevent an NFTL Filing

A. Address the Liability as Soon as Possible

Most NFTLs are either requested systemically through the IRS Inventory Control System (ICS), the IRS Automated Collection System (ACS), or by IRS Field Collection.[12] To improve their chances of preventing an NFTL filing, taxpayers should address the liability immediately after it is assessed by contacting the IRS to discuss an alternative to IRS enforced collection action. With that contact, a taxpayer should request that no NFTL be filed based upon the pre-filing considerations above.

Revenue Officers are required to make reasonable efforts to contact a taxpayer before filing an NFTL.[13] When a Revenue Officer is assigned to a case and an NFTL has yet to be filed, the Revenue Officer will generally contact the taxpayer and request full payment of the unpaid liability.[14] During this initial contact, the Revenue Officer is instructed to advise the taxpayer that, if full payment is not received during this initial contact, an NFTL may be filed.[15] However, the Revenue Officer must consider the pre-filing considerations discussed above when determining whether to file an NFTL.[16] Therefore, a taxpayer should address the pre-filing considerations with the Revenue Officer and request that no NFTL be filed.

Collection employees are responsible for ensuring that all procedures regarding lien actions are properly followed.[17] Regardless whether a taxpayer is dealing with the IRS ACS function or a Revenue Officer, the pre-filing considerations described above should be addressed as early as possible.

B. Request a Manager’s Conference

Collection managers at the IRS are responsible for ensuring that lien actions are in accordance with IRS policy and procedures.[18] Therefore, if an IRS ACS employee or Revenue Officer fails to address the pre-filing considerations, then taxpayers should request a conference with their manager.

C. Request Consideration by the Office of Appeals Before an NFTL Is Filed

The Collection Appeal Program (“CAP”) “was implemented to provide taxpayers or third parties with an opportunity to have collection actions reviewed by an impartial party outside of the Collection function.”[19] Taxpayers can submit a CAP Request to dispute the proposed filing of an NFTL.[20]

On January 19, 2018, the IRS clarified guidance in the IRM at 5.12.6.4 regarding the appropriate CAP procedure when disputing an NFTL filing. The guidance provides specific time frames within which actions should be taken by the taxpayer and the IRS.[21] These time frames are intended to provide taxpayers with quick decisions regarding the NFTL and to prevent taxpayers from requesting consideration under the CAP solely to delay collection.[22] The guidance explains:

• The taxpayer must first discuss the case with the Collection manager.
• The Collection manager or designee must reply to the request for a CAP Appeal conference in a timely manner not to exceed two (2) workdays.
• If agreement is not reached at the manager conference, the manager must advise the taxpayer that they can have the issue addressed by the Office of Appeals by filing a request in writing using Form 9423, Collection Appeal Request.
• If the taxpayer intends to submit a Form 9423, the taxpayer needs to let the manager or Revenue Officer know within two (2) business days after the conference with the manager or collection action may resume.
• If the taxpayer mails the Form 9423, it must be postmarked within three (3) business days of the conference with the Collection manager to avoid collection action.[23]

The IRS Office of Appeals (“Appeals”) makes every attempt to resolve CAP cases within five to fifteen business days of the receipt of the case by the Settlement Officer.24[24] Appeals attempts to hold a conference within two days after receiving the case, but taxpayers can request a short delay not to exceed five business days.[25] It is important to note that if a taxpayer does not participate in the conference within this time frame, Appeals will return the case to Collection as a premature referral.[26]

If a taxpayer presents new information to Appeals that the Revenue Officer has not considered, the Settlement Officer may ask the Revenue Officer to review and comment on that information.[27] However, the Settlement Officer must strictly follow all requirements related to ex parte communications.[28]

While the matter is considered by Appeals, an NFTL filing will be withheld unless a determination is made that filing an NFTL is necessary to protect the government’s interests.[29] Any determination to go forward with the NFTL filing while the case is with Appeals must be approved by the group manager.[30] Appeals will inform the taxpayer of its decision as soon as possible and that decision will be binding.

D. Request Assistance from the IRS Taxpayer Advocate Service

Taxpayers may also contact the IRS Taxpayer Advocate Service (“TAS”) in conjunction with any of the suggested solutions above in an attempt to prevent an NFTL filing.[31]

Conclusion

Although the Federal Tax Lien arises very early in the collection process, tax practitioners should make every attempt to prevent an NFTL from being filed thereafter. In many cases, the filing of an NFTL will not be in the best interests of the taxpayer or the IRS when working toward a resolution in a case. However, due to the nature of the current procedures surrounding the NFTL, it can be very difficult to persuade a Collection employee that it is inappropriate to file an NFTL. Nevertheless, practitioners should reference the IRM and make every attempt available to dispute the NFTL before it is filed.

This article is reprinted with the publisher’s permission from the Journal of Tax Practice & Procedure, a bi-monthly journal published by Wolters Kluwer. Copying or distribution without the publisher’s permission is prohibited. To subscribe to the Journal of Tax Practice & Procedure or other Wolters Kluwer Journals please call 800-449-8114 or visit CCHGroup.com. All views expressed in the articles and columns are those of the author and not necessarily those of Wolters Kluwer or any other person.

[1] See IRM pt. 5.12.1.3 (July 11, 2018).

[2] IRM pt. 5.19.4.2 (March 1, 2018).

[3] IRM pt. 5.17.2.2.1 (March 19, 2018).

[4] Code Sec. 6323; see also Reg. §301.6323(a)-1.

[5] See Code Sec. 6323(a).

[6] See Code Sec. 6323(b).

[7] IRM pt. 5.19.4.5.1 (Jan. 1, 2015). Code Sec. 6320(c) cross-references Code Sec. 6330(c) regarding conduct of the hearing.

[8] IRM pt. 5.19.4.5.1 (Jan. 1, 2015); IRM 5.17.2.3 (Jan. 8, 2016).

[9] Id.

[10] Id.

[11] IRM pt. 5.19.4.5.1.1 (Aug. 4, 2014).

[12] IRM pt. 5.12.1.5 (July 11, 2018).

[13] IRM pt. 5.12.2.2 (Nov. 9, 2015).

[14] Id.

[15] Id.

[16] An NFTL filing determination is not required in all circumstances. For example, when a taxpayer is eligible for, and agrees to, a streamlined installment agreement or in-business trust fund express agreement. See IRM pt. 5.19.4.5.1.1 (Aug. 4, 2014).

[17] See id.

[18] IRM pt. 5.19.4.1.3 (March 1, 2018); IRM pt. 5.12.1.1.3 (July 11, 2018).

[19] IRM pt. 5.12.6.4 (Jan. 19, 2018).

[20] Id.

[21] IRM pt. 5.1.9.4.4 (June 24, 2014).

[22] Id.

[23] Id.

[24] IRM pt. 5.12.6.4.4 (Oct. 14, 2013); see also IRM pt. 5.1.9.4.4 (June 24, 2014).

[25] IRM pt. 5.1.9.4.4 (June 24, 2014).

[26] Id.

[27] IRM pt. 5.12.6.4.4 (Oct. 14, 2013); see also IRM pt. 5.1.9.4.4 (June 24, 2014).

[28] Id.; see also IRM pt. 5.1.9.5 (Feb. 7, 2014), IRM pt. 5.1.9.5.1 (Nov. 12, 2014), IRM pt. 5.1.9.5.2 (Nov. 12, 2014), IRM pt. 5.1.9.5.2.1 (Nov. 12, 2014).

[29] IRM pt. 5.1.9.4.4 (June 24, 2014).

[30] Id.

[31] See IRM pt. 5.12.6.2 (Jan. 19, 2018).