Tax Blog

IRS Tax Lien Withdrawal: A Recent Case Study

by Kelly Hanley, Esq.

Federal Tax Lien Withdrawal Definition

A “tax lien withdrawal” clears the public Notice of Federal Tax Lien, eliminating the IRS’s competition with other creditors for your assets. However, recent Tax Court rulings indicate the IRS retains broad discretion in tax lien withdrawal decisions, even when the taxpayer presents evidence of financial hardship.

Understanding IRS Tax Lien Withdrawal Through Seggerman v. Commissioner

The Tax Court’s recent decision in Seggerman v. Commissioner serves as an illuminating example of a Collection Due Process (CDP) case. Here, the taxpayer, Henry Seggerman, argued for a tax lien withdrawal but provided little evidence of the financial distress caused by the IRS’s lien. A closer look, however, exposes a disconcerting trend of unchecked IRS discretion in collection cases.

The Origin of the Case: A Failed Attempt at Federal Tax Lien Withdrawal

This case began with Henry Seggerman, formerly a producer of horror movies, who was found guilty of tax fraud. After inheriting his wealthy father’s estate in 2001, Henry, along with other family members and advisors, deceptively transferred over $12 million from overseas accounts to his family. As the executor of the estate, Henry submitted an estate tax return that significantly understated the estate’s actual worth. The consequence was a court-imposed restitution order of over $4 million, to be paid in monthly installments equal to at least 10% of Henry’s gross income. After his release from custody, Henry promptly made an initial payment of $600,000 and began his monthly repayments.

However, while he was adhering to the court-ordered restitution schedule, the IRS issued a Notice of Federal Tax Lien (NFTL), prompting Henry to request a CDP hearing in a timely manner. At the hearing, he asked the IRS to execute a tax lien withdrawal given his commitment to the restitution payment plan. After Appeals upheld the NFTL, Henry sought redress in the Tax Court.

The Tax Court Decision: A Barrier to Tax Lien Withdrawal

In the Tax Court, Henry reiterated his plea for tax lien withdrawal, asserting the lien was hampering his ability to maintain regular payments and had necessitated the liquidation of his retirement accounts.

While the Internal Revenue Code (IRC) does permit discretionary tax lien withdrawal if the lien was prematurely or inconsistently filed according to IRS protocols, Henry couldn’t establish a link between his financial hardships and the lien filing during his Appeals hearing. Consequently, the Tax Court affirmed the decision, which included a classification of Henry as “currently not collectible.”

However, the court’s decision indicates a worrying concept of limitless IRS discretion.

The Challenge of Tax Lien Withdrawal

A critical quote from the verdict states, “Even if the petitioner had provided evidence illustrating how the NFTL impacted his income or retirement accounts, the choice to withdraw the NFTL still resides within the respondent’s discretion.” This insinuates that even if compelling evidence shows that the NFTL hinders the capacity to fulfill the liability, the IRS retains the authority to ignore the evidence and maintain the NFTL.

The verdict fails to adequately investigate whether the lien filing and the rejection of the taxpayer’s tax lien withdrawal or lien release request strikes a balance between efficient government tax collection and the taxpayer’s legitimate concern for a minimally invasive collection action.

Moving Forward with a Tax Lien Withdrawal for Income and Business Taxpayers

With liens no longer impacting taxpayer credit ratings, arguing for a tax lien withdrawal based on a balancing analysis may be more challenging. But challenging doesn’t mean unattainable. Implying otherwise is inconsistent with the law, potentially harmful to taxpayers, and could encourage Appeals to avoid thorough assessments of the IRS’s actions from the taxpayer’s viewpoint. 

After all, just because the tax lien no longer affects a credit score doesn’t mean a lien has zero impact on obtaining credit. Even though tax liens do not directly lower your credit score, they can pose potential difficulties in your financial journey. As tax liens are publicly recorded, they could impede your ability to secure a loan or mortgage. Prospective lenders often conduct comprehensive due diligence which may include a search for tax liens. The presence of a tax lien, therefore, might adversely influence a lender’s decision when assessing your creditworthiness or reviewing your loan application.

Need Help with a Federal Tax Lien on Your Property or Home?

Call The Tax Defenders today for a free attorney consultation. We’ll walk you through your options on how best to help with your IRS tax situation. 312-345-5440.

Does the IRS notify you of a tax lien?

Indeed, when you have an outstanding tax debt, the IRS will enact a federal tax lien. This is a legal claim against your property, including property that you acquire after the lien arises. The tax lien is triggered as soon as the IRS assesses your liability, sends you a bill detailing what you owe – known as a Notice and Demand for Payment – and you neglect or refuse to fully pay the debt in time. The filing of the Notice of Federal Tax Lien is a public action alerting creditors that the IRS has a legal right to your property. Despite not being visible on key credit reports, this could potentially influence your ability to secure credit.

How do I get a tax lien removed from the IRS?

Yes, the IRS provides mechanisms to erase a tax lien and its traces through a process known as tax lien withdrawal or tax lien release. To initiate tax lien withdrawal, you need to submit a formal application using the IRS Form 12277. Upon approval, the IRS furnishes a Form 10916(c) as official evidence that your tax matters have been resolved, signaling the complete removal of the tax lien. It’s crucial to remember that tax lien withdrawal doesn’t absolve you of your tax obligations, but it does remove the public Notice of Federal Tax Lien, potentially enhancing your creditworthiness.

What IRS form do I need to release a tax lien?

To officially release a tax lien, the IRS utilizes Form 668(Z), known as the Certificate of Release of Federal Tax Lien. This crucial document signifies that your tax lien has been lifted, clearing the legal claim against your assets. It’s important to understand that releasing a tax lien typically involves either satisfying your tax debt in full or reaching the expiration of the statutory collection period set by the IRS.

Will a tax lien hurt my credit report score?

Although a tax lien does not directly influence your credit score, its existence remains a public record and may adversely affect your ability to secure a loan or a mortgage. Prospective lenders often conduct thorough due diligence, which could include a search for tax liens, when assessing your credit or loan application. Thus, while your numerical credit score won’t be impacted by a tax lien, its presence could nevertheless hinder your financial opportunities.

What is a federal tax lien?

A federal tax lien signifies the government’s legal right to seize your assets in the event of non-payment or underpayment of a tax debt. This legal claim is comprehensive, encompassing all forms of your property – from real estate and personal belongings to financial assets. The purpose of the lien is to safeguard the government’s ability to collect the owed tax debt, underlining the importance of resolving tax issues promptly.