A federal tax lien, sometimes called a "statutory lien," is the government's legal claim against a taxpayer's property when the taxpayer neglects or fails to pay a tax debt. To provide notice to creditors, the IRS files a public document, Form 668(Y), Notice of Federal Tax Lien.
Internal Revenue Code (IRC) § 6323(j) provides the Internal Revenue Service (IRS) with the authority to withdraw a Notice of Federal Tax Lien (NFTL) under certain circumstances. A withdrawal removes the public NFTL, which assures creditors that the government is not competing with them for a taxpayer's property. However, a withdrawal does not extinguish the taxpayer's outstanding tax liability.
A taxpayer's request for a withdrawal must be made in writing. Generally, a taxpayer requests the withdrawal using Form 12277, Application for Withdrawal of Filed Form 668(Y), and Notice of Federal Tax Lien.
The various scenarios in which the IRS may withdraw an NFTL are briefly discussed below.
Premature or Non-Compliant Filing
If the IRS's filing of the NFTL was premature or in violation of IRS administrative procedures, it may be withdrawn. 1 Examples of such instances include but are not limited to:
(i) the filing of a NFTL in violation of the automatic stay in bankruptcy;
(ii) the filing of a NFTL while the taxpayer is in a Combat Zone; or
(iii) the filing of an NFTL by an IRS representative who knows or should have known about available credits.
Taxpayer Entered Into Installment Agreement
If the taxpayer entered into an installment agreement under IRC § 6159 to satisfy the tax liability for which the lien was imposed, the IRS may withdraw the NFTL. 2 In determining whether the NFTL should be maintained or withdrawn, the IRS considers various factors such as whether the installment agreement provided for and/or addressed the NFTL, and whether the installment agreement provided that an NFTL must be or may be filed.
Additionally, if a taxpayer entered into a direct debit installment agreement to satisfy a liability, and the taxpayer is in compliance with a number of conditions specified by the IRS, the taxpayer may be eligible for an NFTL withdrawal.
Withdrawal Facilitates Collection
If withdrawal of the NFTL enables the IRS to collect a greater amount, in the future or immediately, than it would if the NFTL was maintained, the NFTL may be withdrawn. 3 Whether a withdrawal will facilitate collection is determined by the consideration of all relevant case-specific factors. There is no specific set of factors that must be present or conditions that must be met.
Best Interest Provisions
If the withdrawal of an NFTL would be in the best interest of the taxpayer and the United States, it may be withdrawn. 4 For a taxpayer to be considered for a withdrawal under the best interest provisions, there must be (1) a determination by the taxpayer or by the National Taxpayer Advocate with respect to the taxpayer and (2) a determination by the Secretary. Here, the expectation is that withdrawal benefits both the government and the taxpayer.
The IRS considers various issues when making a determination as to a taxpayer's eligibility under the best interest provisions, including, but not limited to, the effect of the withdraw, whether collection of the outstanding tax will be compromised by the withdraw, and the taxpayer's motivations in requesting the withdraw.
Footnotes
1. IRC § 6323(j)(1)(A).
2. IRC § 6323(j)(1)(B).
3. IRC § 6323(j)(1)(C).
4. IRC § 6323(j)(1)(D).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.