When the IRS files notice of the federal tax lien, it causes a very negative impact on a taxpayer’s credit while at the same time providing better protection for its lien. The filing of the notice of federal tax lien provides protection for the IRS against the four competing parties listed in IRC 6323(a) – holders of security interests, judgment lien holders, purchasers and mechanics lien holders. Without filing the notice, the federal tax lien loses to these four competitors for the value in a taxpayer’s property. So, the IRS has pressure to file the notice; however, filing the notice can make the taxpayer less able to pay the taxes. The IRS must balance competing interests in making the decision to file the notice. The decision to file the notice should result from careful consideration of the facts balancing the benefits of increased protection of the lien in debtor’s assets against the negative impact on the taxpayer. I wrote about this tension in 2011 in “Systemic Problems with Low-Dollar Lien Filing” at a time when the IRS routinely filed the notice of federal tax lien whenever the taxpayer owed $5,000 or more. Because the IRS does not generally assign low dollar balance due cases to revenue officers, the decision to file the notice usually receives only a minimal amount of analysis balancing the benefits versus the burdens.
So, the notice of federal tax lien gets filed primarily based on the dollar liability owed by the taxpayer without consideration of other factors. In its Freshstart announcement in 2012, the IRS raised the presumptive point for filing the notice from $5,000 to $10,000. Once filed, the means of removing the notice are limited. When the liability is fully paid or becomes unenforceable by reason of law, section 6325(a) provides for release of the notice of federal tax lien. Release signifies that the lien no longer exists and the notice has no power. Until 1996 the only way to remove the notice ran through the process of release. That year, Congress passed IRC 6323(j) creating the process of notice of lien withdrawal. Withdrawing the notice does not eliminate the federal tax lien but it does remove the notice from the public record and it has the effect of restoring much of the damage the notice does to a taxpayer’s credit rating. The National Taxpayer Advocate has written about this extensively in her annual reports.
The statute provides four bases for withdrawing the notice of federal tax lien: 1) the filing of the notice was premature or otherwise not in accordance with administrative procedures; 2) the taxpayer enters into an installment agreement to satisfy the liability unless the agreement provides otherwise; 3) withdrawal will facilitate collection: and 4) with the consent of the taxpayer or the National Taxpayer Advocate that withdrawal would be in the best interest of the taxpayer and the IRS. If the taxpayer seeks withdrawal after acceptance and payment of an offer in compromise and release of the lien under IRC 6325(a), the only possible provision of the statute that opens the door to withdrawal is the fourth. For the IRS to agree that withdrawal in that circumstance serves the best interest of the IRS is a taxpayer friendly concession that the offer provides a fresh start and new beginning for the taxpayer unburdened not only by the tax debt but by its potentially lingering impact on the taxpayer’s credit.
I do not understand why withdrawing the notice of federal tax lien favorably impacts someone’s credit rating since withdrawing the notice does not eliminate the lien itself and since the credit rating agencies know about the existence of the tax debt as a result of the filing of the notice; however, withdrawal does have the favorable effect. Even more surprising to me, withdrawal has a favorable effect on a taxpayer credit rating even if done after the IRS releases the lien. Because release signifies the satisfaction of the tax debt or it seems better than merely withdrawing the notice and leaving the underlying lien in place but I am a lawyer and not a rater of credit. Chief Counsel has opined that the IRS can issue a notice of lien withdrawal after a release. On March 25, 2015, the IRS Acting Director of Collection Policy issued interim guidance to “clarify the policy regarding the withdrawal of a notice of federal tax lien after the lien has been released due to an accepted offer in compromise.”
When the IRS grants an offer in compromise and the taxpayer makes the payment(s) due under the offer, the IRS releases the lien even though the taxpayer still has the responsibility to remain compliant for five years and may have a collateral agreement. The interim guidance makes clear (1) that the lien may be withdrawn after satisfaction of the offer and (2) that full satisfaction occurs with the completion of the payment due on the offer. This guidance provides a clear path for taxpayers going through the offer process to get the federal tax lien both released and withdrawn meaning that almost immediately after acceptance of an offer a taxpayer who quickly pays can gain the credit rating benefit of withdrawal of the lien.
This result is good news for taxpayers whose credit will benefit from withdrawal and a validation of much effort by the National Taxpayer Advocate pushing for the IRS to grant withdrawal of the lien. While I continue to shake my head over the policy of the credit rating agencies to recognize withdrawal rather than release as a basis for improving credit, I applaud the policy of the IRS to provide this benefit to taxpayers despite the lack of any benefit to the IRS.