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Procedural Considerations on Collection (Liens) – Part One: Authority and Limits on Assessment Imposition of Tax Lien

The flip side to the assessment coin is the IRS’s process of collection.  Collection procedures are really where the rubber meets the road for the IRS, which is charged with collecting the taxes imposed by the Code.[1]

The IRS has two basic mechanisms for collecting an unpaid tax liability.  The first, which this article goes into in some detail, is the federal tax lien.  If the tax lien does not get the taxpayer’s attention, and the IRS must kick its enforced collections action up a notch, then the IRS may levy or distrain the taxpayer’s property, which is discussed at length in this article.

In this first article in our series on Federal tax liens, we discuss the IRS’s authority, and limits thereto, with regard to imposing and enforcing liens against taxpayers.  In the second article in this series on liens, we’ll discuss the procedure and effect of filing a Federal tax lien. In the third article in this series, we will discuss the release and discharge of a Federal tax lien.

Notice and Demand

Within 60 days, after the making of an assessment of a tax,[2] the IRS must give notice to each person that is liable for any unpaid tax. This notice must state the amount and demand payment thereof.[3] So, when Uncle Bill receives a care package from the IRS at his home in Biddeford stating that he has unpaid taxes related to his damn ostrich farm and demanding that he pay the taxes within 30 days of the date that is listed in the upper right-hand corner of the letter, the IRS has discharged their first duty towards collection.

Such notice may be left at the dwelling or usual place of business of the taxpayer, or it may be sent by mail to such person’s last known address.[4] Even if tax is assessed prior to the date payment is due (except for situations of jeopardy), the IRS will not demand payment of that tax until it is actually due.[5] The last known address issue is a whole other ball of wax.  The Abeuova, Ngueyen, and Savedoff opinions from 2020 provide further analysis on the last known address issue, and I encourage you to check them out.

The Imposition of a Lien

If the IRS demand payment on an assessed tax (and any additions) and the person so demanded doesn’t pay (whether through neglect or refusal), the amount of tax due (and any additions) ipso facto becomes a lien in favor of the IRS on all property—real or personal—and rights to property belonging to that person.[6] The tax lien[7] arises at the time the assessment is made and shall continue until the liability for the amount so assessed—or a judgment against the taxpayer arising out of such liability—is satisfied or becomes unenforceable by reason of lapse of time.[8]

Thus, for federal tax lien to arise, three requirements must be met—

  1. There must be an assessment;
  2. There must be a demand by the IRS for payment; and
  3. There must be nonpayment of the tax due.

Thus, no matter how creative Bill wants to get moving around his assets before the lien is actually filed against his ostrich farm, the lien exists and is enforceable against him.  As we’ll see below, however, until the lien is recorded (filed) by the IRS, the lien will not be valid against a subsequent purchaser, holder of a security interest, or another judgment lien creditor—which pleases Ethel, who placed a lien on two of the older birds—Marlene and Darlene—on the one hand, simply to spite Bill, and, on the other, to make sure that he didn’t sell them off to finance another ridiculous, half-cocked endeavor.

Notice Before Filing of Notice of Lien

The IRS must notify the person liable for the assessment of the filing of a notice of lien under IRC § 6323.[9] Not more than five business days after the day that the notice of lien is filed, the IRS must provide a second notice, which must be

  1. given in person;
  2. left at the dwelling or usual place of business of the person; or
  3. sent by certified or registered mail to the person’s last known address.[10]

The notice of filing a federal tax lien must include five elements:

  1. the amount of the unpaid tax;
  2. the right of the person to request a collection due process or equivalent hearing during the 30-day period beginning on the day after the five-day period described in the previous sentence (generally 30 days from the notice of filing a federal tax lien);
  3. the administrative appeals available to the taxpayer with respect to such lien and the procedures relating to such appeals;
  4. the procedures relating to the release of liens on property; and, for something new and different
  5. language related to the revocation or limitation of passports of individuals with seriously delinquent tax debts contained in IRC § 7345.[11]

Notice and Opportunity for Hearing upon Filing of Notice of Lien

One of the most important rights of a taxpayer in the entire collection process is the right to a fair hearing.[12] The hearing must be held if requested by the person, and the grounds of the hearing must be stated.[13] This hearing will be held by an impartial officer in the IRS’s Office of Appeals.[14]

A person may only request one hearing with respect to the tax period to which the unpaid tax relates.[15] Finally, to the extent practicable the hearing on the notice of filing a tax lien will be held in conjunction with the hearing under IRC § 6330.[16]  We’ll discuss these hearings in much greater detail in the next article in this series.


Footnotes:

[1] IRC § 6301.

[2] Pursuant to IRC § 6203.

[3] IRC § 6301.

[4] IRC § 6303(a).

[5] IRC § 6303(b).

[6] IRC § 6321.

[7] Imposed by IRC § 6321.

[8] IRC § 6322.

[9] Pursuant to IRC § 6320(a)(1).

[10] IRC § 6320(a)(2).

[11] IRC § 6320(a)(3)(A)-(E).

[12] Under IRC § 6320(b).

[13] IRC § 6320(b)(1).

[14] IRC § 6320(b)(3).

[15] IRC § 6320(b)(2).

[16] Regarding levies of property.

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