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Getting Thru the IRS Collection Maze

The twists, turns and switchbacks of the IRS collection maze are frustrating, confusing and daunting.  Here are 5 insights on how to make it through the maze as quickly and easily as possible.

Entering the Maze:  IRS Collection Letters

IRS Publication 594 sets forth a general description of the IRS collection process.  It details what a taxpayer should do when they receive an IRS bill, outlines ways to pay overdue taxes, what to do if a taxpayer can’t immediately pay in full, how long the IRS has to collect taxes and, most importantly, the detailed collection actions the IRS can take if a taxpayer doesn’t pay on time.

If a taxpayer files a tax return and didn’t pay the full amount of tax due with the filing, the IRS collection process starts when the IRS sends a bill for the tax due.  An important point to remember is that interest and penalties begin to accrue from the date the tax was originally due, which is why it’s so important to remember to not ignore the IRS bill.

If the taxpayer doesn’t pay the first bill, the IRS will send at least one more bill.  At that point, the taxpayer should either reply that he or she agrees with the amount stated and then take action to either immediately pay the amount in question, or set up an IRS installment payment agreement.  If the amount in question is less than $50,000.00, the taxpayer can set up the IRS installment payment agreement simply by filling out and submitting an IRS Installment Payment Request on IRS Form 9465.

If the taxpayer disagrees with the amount in question, the taxpayer should call the telephone number on the notice, or stop by the closest IRS office. The taxpayer should bring a copy of the notice, and any documentation supporting the taxpayer’s position, to the IRS, so that it can be reviewed by an IRS representative.  If the IRS agrees with the taxpayer, it will make an adjustment to the taxpayer’s account and send out a revised bill.

If the taxpayer still doesn’t respond, however, the IRS collection process begins in earnest.

Maze Twists and Turns:  Potential IRS Actions

If collection letters fail to get a taxpayer’s attention, the IRS will redouble its efforts to collect back taxes.  These efforts may include filing a federal tax lien against a taxpayer, filing a levy, issuing a summons and, in the case of seriously delinquent taxes, perhaps even revoking a U.S. passport. Lately, the IRS has even begun assigning collection matters to a private collection agency.

The IRS Tax Lien

An IRS tax lien is a public notice, often filed in the county clerk’s office or Secretary of State’s office, that puts a taxpayer’s creditors on notice that the IRS asserts a right to all of the taxpayer’s current and future property and rights to property.  Internal Revenue Code Sec. 6321 provides that the tax lien arises when a taxpayer fails to pay a valid tax, after a demand by the Government for payment.  Significantly, as the Internal Revenue Manual makes clear, the lien is effective from the date the Government assesses the tax, which in most cases is different from the date of filing the lien. In general, the IRS has ten years from the date of the assessment to collect the tax liability, although there are multiple exceptions which may either extend or suspend the ten year collection period.

I Want to Refinance; Will the IRS Let Me?

The answer is maybe.

A tax lien prevents a lender from obtaining a first lien position on real estate or other tangible property.  Oftentimes, that means that a potential lender can’t obtain a mortgage of the quality or type it desires.  The end result is that most lenders will refuse to make a loan if there’s a IRS lien in place.

One possible solution is to request and obtain an IRS lien subordination.  The process is long and detailed, but begins with the filing of an IRS Form 14134, Application for Certificate of Subordination of Federal Tax Lien.

There are two statutory rationales as to why the IRS might be willing to subordinate its lien position to that of a potential lender.

The first is Internal Revenue Code (IRC) section 6325(d)(1), and states that a subordination is appropriate when  the government will receive an amount equal to the lien or interest for which the certificate of subordination is issued.

The second rationale comes from IRC section 6325(d)(2, which states that subordination is appropriate if providing the subordination will increase the government’s interest and make collection of the tax liability easier.

The IRS will want multiple documents to justify granting the lien subordination.  These include:

• a description of the property (for example, 2 bedroom house; 2017 Beechcraft twin engine airplane, serial number ABC1234567; etc.);
• the address of the real property;
• a legible copy of the deed or a title showing its legal description;
• appraisals and/or valuations;
• the proposed selling price;
• a copy of the federal tax lien(s) being subordinated;
• a copy of the proposed loan agreement (if available);
• a description of how a subordination is in the best interests of the United States;
• a copy of a current title report;
• a copy of the proposed closing statement (aka HUD-1) or an itemization of all proposed costs, commissions, and expenses of any transfer or sale associated with property; and lastly,
• additional information that may have a bearing on the request, such as the existence of pending litigation, an explanation of unusual situations, etc.

But maybe a lien subordination isn’t sufficient and only a lien release will do.

Is that even possible?  The answer, again, is a definite maybe!

How to Get a Release of an IRS Tax Lien

Don’t dispair.  There are circumstances under which you can get an IRS lien released rather than merely having it subordinated.  For starters, know that IRS tax liens will be automatically released within 30 days of when the related liability is paid in full, or if it becomes legally unenforceable, or when the IRS accepts a bond for payment of the liability. Instructions for requesting a Certificate of Release of a federal tax lien under those circumstances can be found in IRS Publication 1450.

IRS tax liens are also released under other circumstances.  Those include when:

• the Notice of Federal Tax Lien was filed prematurely or not in accordance with IRS procedures;
• the taxpayer entered into an installment agreement to satisfy the liability for which the lien was imposed, and the agreement did not provide for a Notice of Federal Tax Lien to be filed;
• the taxpayer is under a Direct Debit Installment Agreement;
• withdrawal of the lien will facilitate collection of the tax; or
• when the taxpayer, or the Taxpayer Advocate acting on behalf of the taxpayer, believes withdrawal is in the best interest of the taxpayer and the government.

You should use IRS Form 12277,  Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien  to apply to have an IRS tax lien released.   Instructions for having a filed tax lien release can be found in IRS Publication 1450, Instructions for Requesting a Certificate of Release of Federal Tax Lien.

More recently, in its 2011 so-called Fresh Start Initiative, IRS collection restraints were modified when the circumstances under which the IRS will issue a lien release were expanded.  Under the Fresh Start Initiative, the IRS will release a tax lien provided you:

• have entered into or converted your regular installment agreement to a Direct Debit installment agreement; and
• you are a qualifying taxpayer (i.e. individuals, businesses with income tax liability only, and out of business entities with any type of tax debt);
• owe $25,000 or less (if you owe more than $25,000, you need to pay the balance down to $25,000 prior to requesting withdrawal of the tax lien);
• the Direct Debit Installment Agreement must full pay the amount you owe within 60 months or before the Collection Statute Expiration Date (CSED) expires, whichever is earlier;
• are in full compliance with other filing and payment requirements;
• have made three consecutive direct debit payments;
• haven’t defaulted on your current, or any previous, Direct Debit Installment agreement.

The IRS Levy

Another IRS collection tool is the IRS levy, which is substantially different from an IRS tax lien.  A tax levy is an immediate seizure of a taxpayer’s property or rights to property.  Assets that the IRS may seize include property such as a house or car, and also includes rights to property, such as wages, bank accounts, retirement accounts and Social Security payments.  The IRS can assert a levy after it has assessed a tax and sent a bill, the tax was still not paid and, at least 30 days prior to any asset seizure, the IRS sent the taxpayer a CP 90 Notice, Final Notice of Intent to Levy and Right to a Collection Due Process Hearing.

Levies can be challenged and Form 12153, Request for a Collection Due Process or Equivalent Hearing, is the document to use to challenge an IRS levy.  It can be used to challenge several IRS actions or potential levy actions uncluding:

• Notice of Intent to Levy and Notice of Your Right to a Hearing;
• Notice of Jeopardy Levy and Right of Appeal;
• Notice of Levy on Your State Tax Refund;  and a
• Notice of Levy and Notice of Your Right to a Hearing.

An IRS levy can also be released once it has been filed and the IRS has published guidance about how to get a levy released.

In short, the IRS will release a levy if:

• you’ve paid the amount you owe;
• the period for collection ended prior to the levy being issued;
• releasing the levy will help you pay your taxes;
• you enter into an Installment Agreement and the terms of the agreement don’t allow for the levy to continue;
• the levy creates an economic hardship, meaning the IRS has determined the levy prevents you from meeting basic, reasonable living expenses, or
• the value of the property is more than the amount owed and releasing the levy will not hinder our ability to collect the amount owed.

The IRS Summons

The IRS Form 2039, IRS Summons is an IRS collection tool used by the IRS to gather information either to determine or collect taxes owed by a taxpayer. The IRS Summons may be issued either directly to a taxpayer, or the taxpayer’s third-party representative.  The IRS Summons compels the person served with the Summons to meet with an IRS representative and provide information, documents and/or testimony.  Possible documents required may include appropriate books and records necessary to prepare a tax return, or documentation necessary to prepare a Collection Information Statement (typically either a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or a Form 433-B, Collection Information Statement for Businesses).

Potential IRS Action Affecting Passports

On December 4, 2016, Congress passed the Fixing America’s Surface Transportation Act (the FAST Act).  One of the FAST Act provisions requires the Internal Revenue Service to notify the U.S. Department of State about taxpayers owing a seriously delinquent tax debt or obligation.  A Seriously Delinquent Tax Debt is defined by the IRS as an unpaid, legally enforceable federal tax debt owed by an individual in excess of $50,000.00 for which a Notice of Federal Tax Lien has been filed and all administrative remedies under Internal Revenue Code Section 6320 have been exhausted, or a IRS Tax Levy has been issued.  Unless the taxpayer either pays the amount owed (inclusive of  interest and penalties) or makes an alternative arrangement to pay the outstanding obligation, the U.S. State Department is authorized to not issue or renew a taxpayer’s passport.  Additionally, the State Department may take action to suspend or revoke an existing passport.  On February 6, 2017, the IRS published additional guidance regarding potential IRS action affecting passports.  The guidance is located on an IRS webpage entitled Revocation or Denial of Passport in Case of Certain Unpaid Taxes.

Taxpayers and Private Collection Agencies

One recent addition to the IRS collection arsenal is referenced in IRS Publication 4518,  which advises taxpayers what they can expect when it assigns their account to a private collection agency. The same 2015 Act, the FAST Act, which permits the IRS to share information with the US State Department about seriously delinquent tax debt, also permits the IRS to contract with private collection agencies to collect back taxes. Under the FAST Act, Congress authorized  the IRS to contract with private collection agencies, provided they’re held to the same standards of service and taxpayer rights protection as the IRS requires of its own employees. With some exceptions set forth in the Internal Revenue Code, these private collection agencies are required to conform to the Fair Debt Collections Practices Act (FDCPA), specific provisions of which prohibit private collection agencies from threatening or intimidating taxpayers.

To date, the IRS has only authorized four private collection agencies.  They are:

• CBE, of Waterloo, Iowa;
• ConServe, of Fairport, New York;
• Performant, of Pleasanton, California; and
• Pioneer, of Horseheads, New York.

Significantly these private collection agencies contracting with the IRS cannot take enforcement action against taxpayers to collect tax obligations, such as filing a Notice of Federal Tax Lien or issuing a tax levy, although the IRS still retains the legal authority to take those actions.  The four private collection agencies will only work on accounts if the IRS is no longer actively working on the account.

The IRS states that it won’t assign accounts to the four private collection agencies under certain certain circumstances.   Examples of accounts that won’t be assigned include those of minors, taxpayers in combat zones, victims of tax-related identity theft, accounts that are already being paid pursuant to an installment payment agreement,  or those seeking innocent spouse relief.

Contact Mackay, Caswell & Callahan, P.C.

If you’re a taxpayer lost in the IRS collection maze, call one of our New YOrk tax attorneys today.  With over 30 years’ experience and with offices in Albany, New York City, Rochester, Syracuse, Utica and Watertown,we have a New York tax attorney ready to help you through the IRS collection process.

by Joseph M. Callahan, Esq.