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:
- Prevent the taxpayer from selling property and using the proceeds to pay other creditors ahead of the IRS.
- 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.) 18.104.22.168. Usually, this contact is in the form of a field visit, telephone call, or mailed notice. I.R.M. 22.214.171.124. The IRS will usually proceed with filing the federal tax lien approximately 10 days after making contact with the taxpayer. I.R.M. 126.96.36.199. 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.