Howard's IRS and the Law Blog

The time I spend helping my clients results in relationships that allows me to get to know them better.  I enjoy learning about my clients – many are small business owners, including everything from restaurateurs to electricians.  I represent doctors and lawyers and chief financial officers.  Some clients are retired on social security, and others are wage earners with a family.  It is all very diverse.

My clients have different backgrounds, different life experiences, and varying levels of education.

They have all found themselves – unintentionally – with IRS problems.

And they all are good people.

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The Internal Revenue Code does not make it easy to understand how Federal tax liens work.  Hopefully, that is what I am here for.

The starting point to understanding your tax lien is to know that it lasts for the amount of time the IRS has to collect from you – 10 years.  After the 10 year statute of limitations on collections expires, the IRS is required to release the lien.  To accomplish this on a wide scale, the IRS inserts language into the lien that makes it “self-releasing.”  That means it is automatically released when the 10 years is up.

This “self-releasing” aspect of a tax lien is right on the face of the lien.  Here is what a Federal tax lien says:

“IMPORTANT RELEASE INFORMATION:  For each assessment listed below, unless the lien is refiled by the date given in column(e), this notice shall, on the day following such date, operate as a certificate of release as defined in IRC 6325(a).”

Grab your tax lien (I know it may be painful to look at). The top of the document will say “Notice of Federal Tax Lien.”  As an overview, in the center of the lien are six columns, identified with letters (a) through (f). Each column lists (a) the type of tax you owe, (b) the tax years, (c) the last four digits of your social security number, (d) the date the IRS put your balance due on its books, (e) the last day the IRS can refile the lien if it needs to, and (f) a balance due.

Note the balance due is not what you owe now; it is not current and does not reflect accrued interest, penalties or any payments you may have made.

Tax liens may contain a foreign language, but you can learn a lot if you know how to read them.  Let’s focus on the fourth column of the lien (column (d) ), and the fifth column (column (e).  They are the heart of the lien.

Column (d) provides the date the IRS made its assessment against you; in other words, the day the collection statute began.  Take the date in column (d) and add 10 years.  From the lien itself, we now have the date the IRS collection statute should expire.

As stated on the face of the lien, the lien itself operates as a certificate of release after the collection statute expires. Column (e) gives you that date, which is 30 days after the IRS collection statute expired. Hopefully, for you,the lien ends there, after 10 years.

But sometimes there’s a catch:  You may have done something that extended the time the IRS has to collect.  Did you submit an offer in compromise?  File bankruptcy?  Submit a collection due process appeal?  All of these extend the time the IRS has to collect.

In cases where the collection statute is longer than 10 years, the IRS can extend the life of the lien by refiling it to match the longer collection period.  This is where the 30 days comes into play.

If the IRS refiles the lien within 30 days of the collection statute expiration date, the lien remains in place and maintains its priority against all of your other creditors.

Example of lien refiling:  Let’s say you own a house, and it is worth $200,000. You have a mortgage, and you owe $100,000 on it.  The IRS has a tax lien filed, which attaches to all of the equity in your house.  You filed an offer in compromise with the IRS, which was rejected (don’t believe what you see on TV; most are).  It took the IRS 12 months to complete the offer investigation.  Your offer gave the IRS 12 more months to collect against you and the equity in your house.

The tension is that the IRS lien self-releases when the original 10 year collection statute expires, but they have 12 more months to pursue your house.  What happens?

If the IRS timely refiles the lien before the 30 days expires, the tax lien maintains its priority against your house and will remain in place for the additional 12 months you owe the IRS.

If the IRS does not refile the lien timely, the lien loses its priority against your house, although you still owe the IRS for an additional 12 months. Their claim is unsecured.  The point:  You could sell your house if the lien is not timely refiled, and the lien would not be paid at closing.  Or you could put a second mortgage on the house equity as the lien self-released and was not refiled to maintain its priority from the extended collection statute.

One more thing:  The IRS can still refile its lien late – after 30 days – but their priority is at risk for any intervening event.  Using the example above, presume the IRS was late and refiled the lien after 30 days.  Before the lien was refiled, you took out a second mortgage.  The tax lien would now be third in line, after your first and second mortgages. If the IRS is late on the refiling of the lien, the lien goes to the back of the class.

“How long does the IRS usually take to investigate an offer in compromise?” is a great question, and one I am often asked by clients.

The answer is six to twelve months, on average, although it can be longer, depending on the complexity of the case. If an appeal is necessary, add another six months.

But there is a flip side to the often frustrating amount of time it can take the IRS to investigate an offer in compromise.  The IRS does not have forever, and there are ramifications if the IRS takes too long to act on an offer.

If the IRS does not act within two years and notify you of a decision, the offer is automatically deemed accepted.

That’s right – done, at the amount you offered, courtesy of Internal Revenue Code 7122(f).

So, if your offer is sitting in year two of consideration and things are progressing slower than molasses, maybe you want to think twice about the urge to call the IRS and kick it into gear. (If you wait, bear in mind the statute of limitations on collection is tolled while the IRS considers an offer).

Here’s the small print:  The offer is considered accepted only if the IRS does not make a decision on it within two years after it is received.  “Decision” is defined to nclude the IRS rejecting the offer, returning the offer as not processable, withdrawal of the offer by you, or a failure to make payments under a periodic payment OIC.  If you have had any of these happen, the IRS has acted on the offer and made an decision. Time you spend in appeals from a rejected offer is not counted towards the two year time limit.

I have yet to have an offer accepted this way, although I have been close.  The IRS is more than aware of the timing limitations, and disciplinary considerations likely (and unfortunately) wait for the employee with the offer.  But if an offer is progressing slowly, it is important to know how to manage the clock and that too much time can work in your favor.

Some things can be simple to negotiate with the IRS.  If you are looking for a great way to repay an income tax liability to the IRS, consider a streamlined installment agreement.

Streamlined installment agreements are available to anyone who owes under $25,000 and can afford to repay their balance in five years.  If you qualify, the IRS will automatically approve the installment agreement, and there should be no questions asked.

Here are your advantages in using a streamlined installment agreement:

1.     Eliminates disclosure of your finances to the IRS.  The IRS does not require a financial statement (Form 433A or Form 433F) for streamlined installment agreements.   That’s right – no disclosure of where you work, where you bank, what your assets are.

2.     Simplicity in IRS negotiations.  A streamlined installment agreement can be made with one phone call to the IRS.   Just tell them you owe under $25,000 and want to repay the liability over five years under streamlined criteria.

3.     No documentation is required to be given the IRS.  To enter into a regular installment agreement, the IRS usually will require personal documents from you – recent paystubs, three month’s bank statements, verification of your living expenses.  If you notify the IRS that you are electing to repay them with a streamlined installment agreement, no documents are required to be provided.

4.     Eliminates the use of IRS financial standards.  In most installment agreement requests, the IRS will apply its financial standard allowances to your living expenses.  The result is often a request for you to pay more than you can afford.  However, in streamlined installment agreements, the IRS cannot apply their expense allowances as they do not have the information to do so – remember, no financial disclosure is required. Because of that, streamlined installment agreements can result in your payment being lower than if you disclose your finances and the IRS applies their expense allowances.

Example:  You owe the IRS $20,000.  Before you call the IRS, you complete an IRS financial statement.  After applying their expense allowances, you realize the IRS might ask you to pay $1,000/month.  You can afford $400.00, which will pay off the liability in five years and permit you to qualify for a streamlined agreement. You call the IRS, request the streamlined agreement, do not provide the financial statement, and get the $400/month payment.

5.     Saves time and money.  No financial disclosure + no documentation = less time negotiating with the IRS.  If you are hiring a professional to represent you before the IRS, less time should equal less money.  Even if you try it yourself, you are saving time (and aggravation) by going the streamlined route.

Making arrangements to repay the IRS does not have to involve fear or intimidation.  A streamlined installment agreement not only simplifies the process, but provides benefits to you in negotiating with the IRS.

Here is an issue to be aware of before filing a Chapter 7 bankruptcy on the IRS:

I just completed a Chapter 7 bankruptcy.  It was determined to be a no-asset case.  A few months later,  I got a letter from an IRS Revenue Officer stating that even though the taxes were discharged, they are enforcing their tax lien post-bankruptcy on my retirement account, and want to seize the account.  I thought that the retirement account was protected, and anyways, weren’t the taxes eliminated?

To begin with, if the IRS did not file a tax lien before you filed the Chapter 7 and your taxes were discharged, the IRS cannot take your retirement account after the bankruptcy is over.  Without the tax lien, the IRS has no security in the retirement account, and no claim to it.  Case closed.

But what happens if the IRS has filed a tax lien against you (and your property) before your bankruptcy started?

How a tax lien can survive bankruptcy and impact your retirement account

First, it is important to understand the legal concept that a Chapter 7 bankruptcy does not automatically cause Federal tax liens to be released; it is discretionary with the IRS after the bankruptcy is over.  In other words, tax liens survive a Chapter 7 bankruptcy discharge, and the IRS can pursue enforcement of their lien against your property.

(For practical purposes, however, if you have minimal assets, the IRS does not pursue your assets or the lien after the bankruptcy is concluded, and tends to be fair in releasing the lien post-bankruptcy. Retirement accounts come under IRS scrutiny in enforcing their lien post-bankruptcy as these assets often have enough value to yield significant recovery.)

Second, know that retirement accounts are protected assets in bankruptcy; this means that bankruptcy law will allow you to come out of bankruptcy with your retirement account intact. In other words, retirement accounts are assets that are not lost in bankruptcy.

Now put these two parts together:  tax liens survive bankruptcy, and so do retirement accounts.  Hence, a surviving tax lien attaches to a retirement account, and the IRS maintains an interest in it post-bankruptcy, even if the underlying taxes were discharged.

But do not lose faith:  Even if you have a tax lien attaching to your retirement account after bankruptcy, there are still defenses to permit you to keep it and defeat the IRS’s desire to seize it.

Defenses to IRS seizures of retirement accounts after bankruptcy

Your primary defense to an IRS retirement account seizure is that the IRS stands in your shoes as it relates to their ability to take your property, including retirement accounts.  The IRS has the same rights to your property that you have – if you have no rights to an asset, neither does the IRS.  This applies equally to whether the IRS is seeking a post-bankruptcy enforcement of a tax lien or just a straight seizure without any bankruptcy involvement.

Applying this concept to retirement accounts means that if you are still employed, and cannot access your retirement account until separation from employment, death, or disability, neither can the IRS.  The IRS may have a tax lien on your retirement account, but has no right to enforce it because you have no right to the property.

Additionally, you should be familiar with the three factors in the Internal Revenue Manual used by the IRS in considering whether to levy and seize retirement accounts.

Here are the three factors to put to the IRS to show that retirement account seizure is not an administrative priority:

1.     Before levying on a retirement account, the IRS is required to first consider collection alternatives before levying on the retirement plan, including monthly payments.  The IRS generally does not desire to take retirement accounts; it tends to make for bad public policy.

2.     The IRS is generally interested in taking retirement accounts only if the conduct leading to the tax liability was flagrant. The IRS generally wants retirement accounts to pay a tax liability in cases of egregious behavior. Contributing to the retirement account while the unpaid taxes were accruing and a history of employment tax problems are factors in favor of account seizure.

3.     The final factor in whether the IRS will take a retirement account is whether you depend on the money in the retirement account, or will depend on it in the near future. Again, the IRS tends to be sensitive to retirement account seizures, and proving that the money in the account is important to meeting everyday living expenses can be a factor to keeping the money.

Make sure the Revenue Officer assigned to your case is aware of these factors and arguments; a post-bankruptcy Federal tax lien does not mean your retirement account is doomed – there are defenses.

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