Taxpayers owing outstanding federal income tax may wish to avoid the IRS’ filing of a Notice of Federal Tax Lien (“NFTL”). Some reasons for seeking avoidance of a NFTL are if there is an impending property sale, hit on credit, and general anxiousness about the public nature of tax liability coming to light. The IRS policy is to file a NFTL on delinquent income tax that exceeds $10,000.[1]
However, the IRS does provide options for avoiding a NFTL before it is even filed. Those options are:
- Pay the tax. The filing of a NFTL can be avoided if the taxpayer pays the tax. Sometimes it is better to owe money to a relative other than Uncle Sam. The taxpayer can borrower from credit cards, banks, family and friends or other sources and use the funds to pay the tax before the IRS files a Notice of Federal Tax Lien.
- Enter into a Streamlined Installment Agreement. A Streamlined Installment Agreement is offered by the IRS for combined tax lability that does not exceed $50,000. A Streamlined Installment Agreement does not require the taxpayer to submit a financial statement and permits the taxpayer to pay over six years.[2] Under a Streamlined Installment Agreement, the IRS does not automatically file a NFTL, although it can do so if it provides documented justification for doing so.[3] If the assessed tax, penalty and interest exceeds $50,000, the taxpayer may pay the tax down to $50,000 in order to then enter into the Streamlined Installment Agreement.
- Convince the IRS that the filing of a NFTL is more intrusive than necessary. IRC § 6320 requires the IRS balance the need for efficient collection of the tax with legitimate concerns of the taxpayer that actions be no more intrusive than necessary.[4] Factors to be reviewed by the IRS include taxpayer (i) compliance history, (ii) protection of the government’s interest and (iii) whether the filing of a NFTL will hamper collection, such as making it difficult for a business to obtain financing or interfere with a property refinance.[5]
The IRS also has other mechanisms for removing a NFTL already filed, but grounds for convincing the IRS to not file a NFTL in the first place are limited.
Practice Point: When the delinquent income tax exceeds $10,000, it is difficult for the taxpayer to hold off the IRS’s filing a NFTL. Not impossible but difficult.
Taxpayers facing federal income tax liability and an NFTL are encouraged to contact Jared Le Fevre to discuss options for resolving unpaid income tax and tax liens.
About the Author. Jared M. Le Fevre is a Partner in the Tax, Trusts and Estates Practice Group of Crowley Fleck PLLP. Mr. Le Fevre represents taxpayers before the IRS, IRS Independent Office of Appeals, Tax Court, Federal District Court and state tax agencies throughout Montana, Wyoming, North Dakota, Idaho, and Utah. Mr. Le Fevre is involved in federal, state and local tax audits, appeals, and tax resolution throughout these western states. Mr. Le Fevre also advises clients on the tax effects of business and real estate transactions.
[1] IRM 5.12.2.4.1(1).
[2] IRM 5.14.5.2.
[3] Id. at (5).
[4] IRM 5.12.2.3(2).
[5] IRM 5.12.2.3.1.