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Some Interesting Data from this Year’s TIGTA Federal Tax Lien Filing Review

Posted on Sep. 21, 2022

In the Restructuring and Reform Act of 1998 Congress required the Treasury Inspector General for Tax Administration (TIGTA) to conduct annual reviews of certain IRS activities. The law requires TIGTA to annually determine if the notices of federal tax lien (NFTL) the IRS files comply with the requirements of IRC 6320. This year TIGTA had some findings about the IRS lien filing that might be of interest.

I will start with the one TIGTA mentioned last which concerns the liens the IRS chose not to file. The IRS has pegged $10,000 in tax debt as the point at which it will generally file an NFTL. I think that dollar amount is too low and that the IRS should generally not file the NFTL until the amount rises to about $25,000 or more. If the taxpayer owes $10,000 or more the general guidance from the IRM would cause someone at the IRS to trigger the filing of the NFTL unless there is a decision not to do so.

It could also just be that NFTL filings are down in the year covered by the report because of the pandemic.  Almost certainly the pandemic plays a role.  Here is a chart showing the number of NFTLs filed in the past five years:

Figure: image.png

TIGTA created a detailed chart showing the amount owed for the 1,337,932 individual and business taxpayers who owed more than $10,000 at the time of their review.

Figure: image-1.png

TIGTA also did a cross reference to cases with balances due where a Form 1098 for mortgage interest was reported since real property ownership is generally where the IRS gets the biggest bang for its buck with the NFTL.

Figure: image-2.png

The failure to file the NFTL in these cases, particularly the ones over $100,000, suggest the IRS may lose an easy opportunity to collect on its outstanding debt. The cost of filing and servicing the NFTL is low compared to the possible return on the investment in cases where it is known that the taxpayer owns real property.

Because of the low number of revenue officers, most cases with liabilities below $75,000 or $100,000 are handled by the Automated Call Sites (ACS) and not by Revenue Officers (RO). This means that decisions on many NFTL filings are made by people with less collection experience. It appears that the IRS is failing to make a decision and failing to file the NFTL. The failure to file the NFTL may be good for the first category of cases in the chart. Perhaps this reflects a de facto decision by the IRS that it’s not worth the time and effort to try to file a lien but it could also be bad for the other cases in the chart where there are a decent number of high dollar delinquent accounts where the IRS does not perfect its priority by filing the NFTL. I cannot imagine why the IRS would not file the NFTL on almost all of the 3,000 cases over a million dollars in delinquent debt.

In addition to the finding that the IRS is neglecting to file the NFTL, the report made a few other findings of significance. When the IRS files an NFTL for the first time in a tax year, it must provide the taxpayer with Collection Due Process (CDP) rights. Unlike the notice sent with respect to levies, the notice in lien cases is sent after the filing of the NFTL in order to keep taxpayers from selling or encumbering property before the IRS files the NFTL. TIGTA found that the Collection failed to send the CDP notice to the correct address in 5 of 34 cases in which the notice went undelivered. This makes it hard for taxpayers to contest the filing of the NFTL.

In addition to failing to send the CDP notice correctly to taxpayers, TIGTA found that the IRS did not send the notice to the taxpayer’s representative in six of 57 sample cases – about 11% of the time. The failure to notify the representative severely compromises a taxpayer’s ability to request a CDP hearing within the short 30-day time period provided in the statute. It will be interesting to see how this might play out after Boechler when taxpayers request additional time because of the failure of the representative to receive notification.

The study found that the IRS fails to do the appropriate research to find the taxpayer’s current address and to find information regarding taxpayer’s representatives. These should not be difficult things to fix but these should not be items that need fixing at this point.

In cases where the IRS fails to send the NFTL notice to the taxpayer’s last known address the taxpayer’s ability to get a CDP hearing would be impacted but the validity of the notice would not be impacted. I know of no cases striking down the notice as invalid based on a failure of notice to the taxpayer after the filing of the NFTL.

Once the bad mailing came to light the taxpayer should receive another letter which would trigger CDP rights or should be able to come into the CDP process more than 30 days after the bad mailing.  When I say bad mailing I mean a mailing where the notice to the taxpayer of the filing of the NFTL was not sent to the taxpayer’s last known address.

Some of the cases in which the taxpayer did not receive the notice in the TIGTA report may have been situations in which the IRS would win on whether the notice was sent to the taxpayer’s last known address. TIGTA did not get into the weeds on the validity of the notice from that perspective.

If the IRS sent the letter to the taxpayer’s last known address but the taxpayer did not receive the letter, there should be no question about the validity of the NFTL. The ability of the taxpayer in that situation to obtain a CDP hearing might depend on where the equitable tolling case law in CDP cases goes.  TIGTA rightly points out that maybe the IRS should try to reach out to taxpayers when it learns that their “last known address” was not in fact their address because the correspondence was returned. Deciding how far to go in these situations has long been a challenge for the IRS.

Maybe the report is good news for those taxpayers who have not had a NFTL filed against them. If they are lucky, the statute of limitations on collection will run before the NFTL is filed or the IRS takes other collection action.

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