The Enforcement Process
Enforced collections is a process that starts after requests for voluntary compliance to the taxpayer fail. The process is pretty simple and straightforward:
• A tax return is filed (or not)
• The tax liability is paid (or not)
• The IRS officially assesses the tax (ASED/CSED tolled)
• The tax liability is paid (or not) upon demand
• Liens is placed on the account
• Notice of Federal Tax Lien (NFTL) is issued to taxpayer
• Efforts are made to have taxpayer get compliant
• Enforced collections efforts are implemented (Levies)
• Enforced collections efforts are made on property in the taxpayers control (Seizures)
When a taxpayer comes to you in the process of collections activity it is imperative that you quickly determine where, exactly, in the process he stands. This will determine your next actions. Pulling a set of account transcripts will help you make this determination. If you do not have a copy of the IRS Document 11734, Transactions Codes Pocket Guide, you need to download one. This guide will help you understand the specifics of what has transpired before you received the case.
When Does The IRS Institute A Lien?
Prior to the IRS being able to institute a lien against a taxpayer several things must happen. First, an assessment of tax liability must be made. This is done when the taxpayer files a return with a tax liability on it or a taxpayer fails to file a tax return and the IRS files a Substitute For Return (SFR) for him and assesses a tax liability based on the reporting documents they have available.
Secondly, the IRS must make a demand for payment from the taxpayer. This is done in a series of escalating letters sent to the taxpayer which include a balance due letter with Publication 501, The Collection Process; Letter 501 (Balance Due Reminder); Letter 504 (Balance Due Urgent Notice); and Letter 1058 (Final Notice Intent to File NFTL, right to appeal).
The taxpayer must neglect to pay or refuse to make a payment on the account after these notices.
Once these qualifications are met, a Federal Tax Lien (FTL) is created automatically by statute and attaches to the taxpayers property and rights to property in the amount of the total liability. This is sometimes called a “silent” lien because at this point nothing has been filed with any outside agencies and is only known to the IRS and the taxpayer.
The collections Division must determine if filing a FTL is appropriate by conducting a review of items including the taxpayers responsiveness to collection efforts, financial condition, history of tax issues, ability to pay the tax, compliance with current tax mandates and if there is another FTL in place already.
At this point the IRS will issue a NFTL via certified mail to the taxpayers last known address. This also includes a notification within 5 business days of their right to a CDP hearing via Form 12153. This will actually place on record of other agencies (banks, employers, county tax offices, etc) the fact there is a tax lien in place against the taxpayer and his property. The FTL stays in effect until it is either satisfied or the CSED expires.
The FTL is one of the most powerful tools in the Collections Divisions arsenal. It is when someones tax troubles “goes public”. Most taxpayers and businesses are willing to go to great lengths to stop that from happening.
State laws govern where a lien must be filed. Normally, real property liens are filed in the location the real property is physically located and personal property (tangible or intangible) are filed where the taxpayers residence is at the time of the filing.
State laws also govern the timing of a transfer of property to others. Normally the taxpayer is not allowed to transfer property to other parties to avoid the filing of a FTL. The date is usually the date of the assessment by the IRS.
The filing of a FTL is not always the only lien against a property. A homeowner’s mortgage is a lien; as is the note holder in the purchase of secured property such as a vehicle. In these cases the IRS must establish whose lien has the highest priority. There are four circumstances in which another lien would take priority over a FTL:
1. A Purchaser – Someone who has put forth money to acquire an interest in the taxpayers property that is valid under state law.
2. A Judgment Lien Creditor – A valid, perfected court judgment against the taxpayer.
3. A Mechanic’s Lien – One who has a lien on real property for services or materials provided to build or improve the property.
4. A Holder of a Security Interest – One who holds any interest in the property acquired by contract for the purpose of securing payment. (i.e. a mortgage holder or note holder)
A Revenue Officer also has the option to not place a lien or delay placing the lien in certain conditions, including if the lien would hamper collection of the liability or there is some doubt as to the liability.
At this point, you, as the taxpayer’s representative, should make sure the actual review was conducted and the other requirements were followed. If you think the Collections Division may have not followed the established procedures you may file a CAP via Form 9423. We will discuss the CAP and CDP programs later in this course.