A Notice of Federal Tax Lien (NFTL) can cause irreversible harm to an individual or a business. The NFTL is usually filed with the County recorder and/or the Secretary of State at exactly the wrong time, that being when the individual or business has the greatest need for good credit. The NFTL will damage a good credit rating and possibly prevent creditors and vendors from continuing or starting to do business with the individual or business. Sometimes, the taxpayer’s real concern does not involve their credit, but rather, the damage to their good reputation.

We are often asked how to stop the IRS from filing a NFTL. Other than paying the obligation in full or filing a petition in bankruptcy, stopping the filing of the lien is dependent on convincing the IRS that not filing the lien is in its best interests. We understand from recent conversations with IRS representatives that while it has been difficult in the past, stopping the lien filing is about to become even more difficult.

The IRS’s primary goals in filing a NFTL are to:

1. Prevent the taxpayer from selling property and using the proceeds to pay other creditors ahead of the IRS. 
2. Protect the IRS’s position ahead of other creditors who may also be pursuing or intend to pursue the taxpayer and could obtain a security interest, a mechanic’s lien, or judgment.

The IRS is required to try to contact the taxpayer prior to filing the federal tax lien. Internal Revenue Manual (I.R.M.) 5.12.2.3. Usually, this contact is in the form of a field visit, telephone call, or mailed notice. I.R.M. 5.12.2.1. The IRS will usually proceed with filing the federal tax lien approximately 10 days after making contact with the taxpayer. I.R.M. 5.12.2.4. So, the keys to preventing the filing are to make a timely demonstration to the IRS that it does not need to worry about these issues and that it will be in a better position if it does not file the lien. This is difficult, but it can be done in the right circumstances.

One option is to request a hearing with an Appeals Officer under the Collection Appeals Program (CAP), prior to the filing of the lien. Filing a CAP hearing allows the taxpayer to raise any grievances and ensure IRS rules and regulations are followed. Unfortunately, the CAP procedures do not give the Appeals Officer much authority beyond reviewing the administrative handling of the taxpayer’s case. Processing these hearings can take between 14 and 60 days, depending on the backlog. There are no appeal rights that accompany these hearings, so the hearing officer’s decision is final.

You may also receive a notice of a right to Collection Due Process (CDP) hearing prior to the filing of the lien. Again, this allows you to ask an Appeals Officer to consider delaying or preventing the lien by showing him or her that it is the best interests of the IRS to not file the lien. The advantage of a CDP hearing is that the Appeals Officer has much more authority and can consider delaying the lien if it is in the best interests of the IRS. You may negotiate a collateral agreement, post a bond to guarantee the IRS’s interest, or prove that filing a federal tax lien will hamper the IRS’s ability to collect the obligation.

If the NFTL has already been filed, you may still have an option. You may submit an Application for Withdrawal of a Federal Tax Lien. The IRS will withdraw the federal tax lien if it was filed prematurely or incorrectly. The withdrawal has the advantage of removing the lien as if it had never been filed.

A divorce is usually stressful enough without the added concern of obligations to the IRS. Unfortunately, many couples must deal with an IRS obligation as part of dissolving their marriage. The family law court may designate who is ultimately responsible between the parties to pay the debt. But, it cannot stop the IRS from pursuing both spouses, if both were originally liable for the debt. A court order designating that only one spouse is responsible for the taxes simply gives the non responsible spouse the right to seek reimbursement from the responsible spouse for any taxes paid.

The non responsible spouse may ask the IRS to find him or her to be an “innocent spouse,” and therefore not liable for the tax obligation, but that is a separate procedure involving negotiations with the IRS, not something the family law court can decide. Please review our previous article on innocent spouse relief for more information.

Even if a spouse was never originally liable for the taxes or has been relieved of the liability as an innocent spouse, he or she must still be concerned about the impact of a Notice of Federal Tax Lien against their spouse. The lien will encumber the liable spouse’s interest in his or her non marital property and marital property. The parties must take these liens into account when negotiating a property division. A court order awarding property from one spouse to another does not eliminate the tax lien.

The lien is even more treacherous when the non liable spouse does not know about the obligation and, at the time the petition for dissolution is filed, there is no Notice of Federal Tax Lien filed with the county or the state. The parties may negotiate or the court may be ready to order a division of property that grants the liable spouse’s property to the non liable spouse, completely unaware that the IRS is about to file a Notice of Federal Tax Lien. If the IRS files its Notice of Federal Tax Lien before the order granting the transfer, it could encumber the liable spouse’s interest in property and possibly destroy the value of the property to the non liable spouse. The non liable spouse may not learn of this problem until months or years after the dissolution is final and long after there is anything practical that the court can do about it.

Some taxpayers have argued that Minnesota Statutes Section 518.54, Subd. 5, protects marital assets from a creditor like the IRS who files a federal tax lien after the petition for marital dissolution is filed. The argument is that the marital interest in property vests in the spouse as of the date the petition for divorce is filed. See Gardner v. United States, 34 F.3d 985 (10^th Cir. 1994) (interpreting a Kansas statute similar to Minnesota’s statute). Therefore, if the IRS files its lien after the petition is filed, it is too late to encumber the property. This allows the family law court to make an allocation of assets from the marital estate without having to worry about what transpires between the date the petition is filed and the date of the final order.

Minnesota courts have not followed Gardner in applying this statute in areas beyond marital dissolution. The Minnesota statute was simply meant to clarify that divisions of marital property are not taxable events. No Minnesota court has applied the statute to change property ownership in a way that will affect claims by the spouses’ creditors. See In re Johnson, 210 B.R. 153 (1997).

To avoid problems with undisclosed or unknown tax obligations and tax liens, the parties to a marital dissolution should ask the IRS for an account transcript showing the status of their tax obligations. They can obtain this transcript by filing a Form 4506-T and requesting account transcripts for all relevant years. If either spouse owns or has owned a business, the parties may need to investigate further to obtain a clear picture of all of the existing or potential obligations.