Filing of Federal Tax Liens at record highs to detriment of taxpayers and economy-at-large
The number of Notices of Federal Tax Liens filed against delinquent taxpayers in recent years is on an alarming upward trend. Since 2003, the number of Federal Tax Liens filed against those who owe back taxes to the IRS has increased by 250% (see chart below). Meanwhile, the number of Tax Liens released by the IRS has remained stagnant. This trend is likely to continue, which is terrible news for taxpayers in trouble, and even worse news for the economy generally.As discussed below, the filing of a Notice of Federal Tax Lien can have far-reaching and potentially devastating consequences for a taxpayer, even after the tax obligation is satisfied and the Lien released.Yet, there is a solution.
A Notice of Federal Tax Lien: What does it mean?
If a taxpayer owes a debt to the IRS, initially that information is known only to the IRS and the taxpayer. If the tax debt reaches a certain size or remains unpaid for an extended period of time, however, the IRS will issue a “Notice of Federal Tax Lien.” The process itself might seem surprising. First, the IRS records the Notice of Federal Tax Lien (in county courthouse or on local land records, depending on jurisdiction). Once the Notice of Federal Tax Lien is filed, the IRS then sends a letter to the taxpayer explaining that the Lien has been filed. To reiterate, the IRS first files a Notice of Tax Lien, and then it lets the taxpayer know about it. At that point, the IRS gives the taxpayer an opportunity to challenge the filing of the Lien at a “Collection Due Process Hearing.” As a practical matter, challenges are difficult and time-consuming.Moreover, as discussed in the following section, even if a subsequent challenge proves successful, and even in situations where the delinquent taxpayer has the financial ability to satisfy the tax obligation in full, once the Notice of Federal Tax Lien is filed, irreparable harm may have already been done to the taxpayer.
The Damage Done by the Filing of a Notice of Federal Tax Lien
All three credit reporting agencies immediately pick up on the Notice of Federal Tax Lien. The filing of one Notice of Federal Tax Lien for an amount under $50,000 will lower a credit score by more than 100 points, resulting in immediate and problematic consequences for the taxpayer.For example, the taxpayer’s credit score may increase the cost of refinancing, or prevent him from obtaining loan modifications or lines of credit.Often, a Notice of Federal Tax Lien will preclude a taxpayer from borrowing altogether, or force him to do so from non-traditional sources, such as family, friends, and even loan sharks.
Additionally, the filing a of Federal Tax Lien dims employment prospects, especially for those seeking executive or other higher-end positions.Nearly every job applicant in this tough economy is subject to a background check. Part of each background check is a credit report. Thus, prospective employers will see the Notice of Federal Tax Lien on the applicant’s credit report.Clearly, applicants with good credit ratings have an advantage over those deemed poor credit risks in this highly competitive job market.
Most disturbing of all, the detrimental effect of the filing of a Notice of Federal Tax Lien on the taxpayer’s credit report survives the tax obligation upon which it is predicated, because even when the Notice of Federal Tax Lien is no longer operative and has been released by the recording of a Certificate of Lien Release, the Notice of Federal Tax Lien remains on the taxpayer’s credit report for a minimum of seven years, and potentially indefinitely.This is true even after the taxpayer has resolved his tax problem with the IRS.
There is a little-known solution to this problem, discussed below, but first, the reasons for the increase in the number of Federal Tax Lien filings merits brief discussion.
The Reasons for the Increase in Federal Tax Lien Filings
First, the economic downturn has led to a significant increase in the number of delinquent taxpayers (and a lot of these folks are people who have never had a tax problem before). One common cause of taxpayer delinquency in recent years has been the taking of early distributions from retirement savings accounts such as 401(k)s, in order to address cash flow problems or respond to financial emergencies.Cash flow issues have also led small business owners, the self-employed and 1099 independent contractors to fall behind on their estimated and payroll tax payments.With real estate values still plummeting, traditional banks afraid to lend, and hard money lenders scarce, problems once easily addressed by borrowing against the equity in one’s home or other real property now result in additional tax liabilities that taxpayers cannot afford to pay.
Prior to 2009, IRS collection agents used such Liens as a last resort. Now, however the IRS’s Automated Collections Services (ACS) automatically issues liens when certain conditions are met and local IRS Revenue Officers (ROs) are under marching orders to issue liens in connection with their cases.This is true even in situations where the taxpayers have entered into agreements to fully pay the delinquent taxes.
Given the current state of the economy, with the number of delinquent taxpayers on the rise, a reversal of the IRS’s new “liens first/questions later” policy seems unlikely.The addition of 16,000 new IRS Revenue Officers in 2010 may certainly be read as a clear indication of its intention to step up enforcement efforts.Thus, one may reasonably expect the upward trend in the number of Federal Tax Lien filings, and their concomitant detrimental effects upon taxpayers specifically, and upon the U.S. economy generally, to persist, if not worsen.
The Secret and the Hope: Withdrawals are Golden and are Very Possible
There are numerous cases where taxpayers have no assets, yet the IRS files a Tax Lien. Additionally, the IRS does no inquiry to whether or not a Tax Lien would be disastrous to a taxpayer’s employment or business, yet Federal Tax Liens are filed anyway. The IRS will file a lien even where an installment agreement is in place, even where the taxpayer. the current application of the lien is misused.
The filing of a Notice of Federal Tax Lien can have a devastating impact on a taxpayer’s credit report; one that can even survive the satisfaction of the tax delinquency and subsequently Release the Lien.This is a destructive process:ultimately, it does not help the IRS to collect money, and it is not in the interest of the United States government to create a permanent underclass. Fortunately, there is a way to minimize, if not eliminate, the impact of a Notice of Federal Tax Lien on a taxpayer’s credit report.
As mentioned earlier, a Release of Federal Tax Lien does nothing to remedy the damage done to a taxpayer’s credit report by the filing of the Notice of the Lien, because the Notice (and the Release) remain on the taxpayer’s credit report for a minimum of seven years.In order to eliminate the negative impact the Lien has on the taxpayer’s credit rating, one must obtain a Withdrawal of Federal Tax Lien.Unbeknown to many, including most tax practitioners, a Withdrawal effectively erases the Notice of Federal Tax Lien from the taxpayer’s credit report, making it appear as if the Lien were never there.
Practically speaking, and what many tax attorneys don’t know is that any taxpayer may ask the IRS to withdraw a Notice of Federal Tax Lien, even if the Lien was previously released. As recently pointed out by National Tax Payer Advocate Nina Olsen, the IRS’ previous claims that a Released Lien could not be withdrawn are unsupported by the law.
Conclusion
The number of filings is and expected to continue to increase. Given state of the economy, we will continue to see an increase in the of delinquent taxpayers, and this current IRS policy is strangling taxpayers who are trying to dig out of trouble. Thus, it is essential that taxpayers do not take the filing of a Federal Tax lien laying down and fight it. The cost of allowing a lien to remain can be paralyzing. And the golden lien withdrawal solution is, while not guaranteed, is nonetheless, available.
Thanks to David Dean at usadata for giving us the ugly statistics.
For the IRS Lien Withdrawal Form click here.
