In Webb v. IRS, No. 1:17-cv-00058 (S.D. Ind. 2020) taxpayers get a sad lesson in the ability of the federal tax lien both to survive bankruptcy and to come back to life after release. This is not a story of foreclosure, though that chapter may still be written, but rather a story first of what bankruptcy can and cannot do with respect to tax liens (and liens in general) and second of the power of federal tax lien revocation. When the dust settles, the taxpayers come out of bankruptcy with their discharge, including a discharge of the federal taxes at issue, but with a home (and any other assets they have) still encumbered by the federal tax lien.
In 2010 the IRS filed notices of federal tax lien (NFTLs) against the Webbs in the jurisdiction where they lived and owned a home. In 2013 the Webbs jointly filed what must have been a chapter 7 bankruptcy petition. On their schedules they listed all of their assets and liabilities including their home. They must have claimed a homestead exemption for all or part of the equity in their home based on Indiana laws. The exemption varies from state to state, and I did not go and look up the available exemption in Indiana. On November 4, 2013, the bankruptcy court granted the Webbs a discharge. The court doesn’t lay out the facts in a way that makes it easy for me to state the years for which the Webbs owed taxes when they filed their petition, but it seems that they owed for several years and that the years were fairly old making them susceptible to discharge.
After the bankruptcy discharge, on February 10, 2014, the IRS abated the tax liabilities and released the tax liens. The discharge requires the IRS to not seek to collect from the taxpayers any discharged liabilities; however, it does not prevent the IRS from collecting liabilities from property to which its lien attaches. Apparently, the IRS acted first to avoid violating the discharge injunction and they, two years later, came to the realization that the Webbs retained property after the discharge to which the federal tax liens attached. After coming to that realization, the IRS needed to reverse the abatement of the taxes and revoke the release of the federal tax lien. It reversed the abatement in 2016 and revoked the releases in 2017 to 2019.
People filing chapter 7 bankruptcy may spend little time with a lawyer discussing what precise debts will survive bankruptcy. If they do have this discussion, it often does not include the distinction between discharging the personal liability on the underlying tax and the survival of the lien. So, many debtors in the Webbs position would expect their tax liabilities to go away and when the IRS wipes away the liabilities immediately after bankruptcy, the action reinforces their expectations.
It is not surprising that the Webbs would react with shock and dismay as the IRS reverses the abatement of their tax liability and reinstates its liens. Unfortunately, the IRS can do this and their arguments failed.
Discharge of Liens
The Webbs first argue that the IRS cannot reinstate the liens because the tax liabilities were discharged. This argument fails and it should. This argument does not make a distinction between the effect of the discharge on their personal liability for the tax debt versus the effect on the lien encumbering their property. A bankruptcy discharge can wipe out a personal liability but does not affect a lien interest. The court establishes that the IRS validly established the liens prior to bankruptcy and then describes the law regarding the survival of liens including tax liens.
Reversal of Abatement
The Webbs next argue that the IRS could not reverse the abatement of the assessments because the tax liabilities were discharged. This argument also fails because the lien interest allows the assessment to survive (or to be reinstated.) According to the court the IRS did not cite to cases that established this exact point, but it did find other cases regarding reversal of abatement that supported the IRS position.
Revoking the Lien Release
The IRS regularly releases liens it later regrets releasing. The Webbs continue to argue that the IRS cannot revoke the release because of the effect of the discharge. IRC 6325(f)(2) allows the IRS to revoke a release if it releases a lien “erroneously or improvidently. Here, the IRS stated that it acted erroneously or improvidently in releasing the lien initially. The court finds that the IRS followed the appropriate procedures in reinstating the lien. Therefore, the court finds the refiling of the liens after the revocation of the release to properly reestablish the liens.
Limitations on Scope of Liens
When the IRS filed its claim in the chapter 7 case it claimed a secured amount of $12,357.00 and a general unsecured amount of $383,527.99. I cannot say exactly why the IRS filed its claim with those amounts but it normally calculates the equity of its liens based on the statements in the debtor’s schedules. The IRS does not perform a separate analysis of the value of the debtor’s property in filing its claim form. Here, the Webbs’ argument is that if the court allows the IRS to reverse the abatement and reinstate its liens, the IRS can only assert a lien interest in the amount listed on its claim.
The court discusses the cases cited by the Webbs but not any cases the IRS might have cited. It concludes that the IRS can pursue its lien claim in the amount of $395,884.99 the full amount of the lien. This does not mean that the IRS will collect that amount. The case does not provide enough information to allow speculation on the amount the IRS will ultimately collect on its lien claim but it could be much closer to $12K than $395K. The IRS can only collect from assets in existence at the time of the bankruptcy filing. It cannot collect from the Webbs personally. Its lien claim does not come ahead of the first mortgage on the Webbs’ home.
The lien claim probably matches the amount of the Indiana homestead exemptions plus whatever increases in value have occurred with respect to the assets the Webbs protected using their homestead exemption. Not only does the discharge limit the IRS in the assets from which it can pursue to satisfy the debt but the discharge makes it difficult for the IRS in other ways. It must make sure that in reinstating the assessment its computer does not offset subsequent refunds due to the Webbs. In cases of this type the primary available asset of any value may be the Webbs home. The IRS must now navigate the issues regarding administrative seizure and sale of a home or bring a suit to foreclose its lien on the home. The IRS does not go after people’s homes that often though certainly it can do so.
The Webbs were right to want to prevent the reassessment of the liability and reattachment of liens but had little defense to this action, which can cruelly come after the victory party they may have held upon receipt of the discharge. I expect that having gone this far the IRS will pursue collection from their home but that brings another case. This case simply reestablished the liens. It did not enforce them.