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Release of Levies & Liens

The federal tax lien and the administrative tax levy are the two principal tools the Internal Revenue Service uses to collect unpaid tax liabilities. The lien and levy are administrative collection tactics; neither requires any judicial action to become effective. Although they are closely related, they are used for different purposes and have different effects. A lien is a security claim against the Taxpayer’s property to secure the tax debt, whereas a levy is the actual seizure of property to satisfy the debt.

Federal Tax Levies

The Internal Revenue Service is authorized to start procedures to levy on the property of any person liable to pay any tax who fails to do so within ten days of notice and demand for payment. Generally, the Internal Revenue Service may levy upon any property or property rights of a delinquent Taxpayer other than those specifically exempted from levy. The Internal Revenue Service can seize real or personal property; seized personal property can be tangible or intangible. A lien is merely a security interest that protects the Internal Revenue Service’s interest while the Taxpayer remains in possession; but a levy allows the Internal Revenue Service to forcibly seize the property. A lien is not required to be placed upon a property before it is levied, although such a sequence is often the case.

There are two types of levies: continuous and noncontinuous. As a general rule, levies only attach to property and obligations in existence at the time of the levy. Therefore, most levies are noncontinous. However, there are two exceptions to that rule:

  1. A levy on wages is continuous from the date of the levy until the levy is released; and
  2. The Internal Revenue Service can approve a continuous levy on up to fifteen percent of certain specified payments made to or received by a Taxpayer that are otherwise exempt.

Before the Internal Revenue Service can actually make a levy, it is required to provide the Taxpayer with notice of intent to levy and notice that the Taxpayer can appeal the proposed levy in a Collections Due Process Hearing. The notice of intent to levy and notice of a right to a hearing, also known as the “30-Day Notice” is in addition to the initial notice and demand for payment that the Internal Revenue Service is required to give after making an assessment.

Release of Federal Tax Levies

The Internal Revenue Service is required to release a levy if:

  1. The liability for which the levy was made is satisfied or becomes unenforceable through lapse of time;
  2. Release of the levy will facilitate collection of the tax liability.
  3. The Taxpayer has entered into an installment agreement (unless the agreement prohibits releasing the levy, or releasing the levy would jeopardize the government’s status as a secured creditor);
  4. The Internal Revenue Service determines that the levy is causing the Taxpayer an economic hardship; or
  5. The fair market value of the property exceeds the tax liability and release of the levy on the property could be made without hindering the collection of the liability.

As a practical matter, before it will consider releasing a levy, the Internal Revenue Service will generally request that the Taxpayer file any missing tax returns and provide a financial statement.

Federal Tax Liens

A federal tax lien arises after the Internal Revenue Service assesses the tax and issues a notice and demand for payment, but the Taxpayer fails to pay the full amount demanded. After the Internal Revenue Service makes its demand, the Taxpayer has ten days in which to pay. If the Taxpayer fails to do so, the lien becomes effective as of the date of assessment. A federal tax lien attaches to all of a Taxpayer’s property at the time the lien arises and all property acquired after the assessment date. A state statute exempting certain property from the claims of creditors does not affect a federal tax lien, because only federal law can exempt property from a federal tax lien.

A tax lien gives the Internal Revenue Service a security interest in all the Taxpayer’s property. It does not give the Internal Revenue Service a priority position relative to other creditors unless they have knowledge of the tax lien, which occurs when the Internal Revenue Service provides actual notice or files a Notice of Federal Tax Lien. Although a federal tax lien automatically attaches to all of a Taxpayer’s property, a Notice of Federal Tax Lien must be recorded to have priority over other creditors’ liens. Until a tax lien is filed, it is not valid against competing claims of purchasers, holders of security interests, mechanic’s lienors, and judgment lien creditors.

To gain priority over other creditors, the Internal Revenue Service must file a Notice of Federal Tax Lien in the recording office designated by the state or government subdivision. The Internal Revenue Service must notify the Taxpayer in writing of the filing of a lien within five days of the filing. The notice must include:

  1. The amount of the unpaid tax;
  2. The right to request a hearing within thirty days after the five-day period;
  3. Administrative appeal procedures; and
  4. The provisions and procedures relating to release of liens.

Once a federal tax lien arises, it continues until the liability is satisfied or becomes unenforceable because the statutory collection period has expired. However, the lien may be released, withdrawn, or subordinated, and any property may be discharged from it or certified that the lien does not apply to that property.

Release of a Federal Tax Lien

The release of federal tax lien operates to completely extinguish the lien. The Internal Revenue Service must release a tax lien no later than thirty days after the day on which:

  1. The tax liability secured by the lien is fully satisfied;
  2. The tax liability becomes legally unenforceable; or
  3. The Internal Revenue Service accepts a bond for payment of the amount assessed plus interest, executed by a surety company that the Treasury Secretary has authorized to issue federal bonds.

Federal tax liens self-release when the statutory collection period expires.

Subordination of a Federal Tax Lien

In certain circumstances the Internal Revenue Service may agree to subordinate its lien to the interest of another creditor. The Internal Revenue Service has discretion to issue a certificate of subordination if the government is paid an amount equal to the amount by which the tax lien will be subordinated or if the Internal Revenue Service believes that the subordination will ultimately increase the amount realizable form the property in question.