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Law Offices Of Michael D. Daniels RELEASE FROM LIEN\LEVY Generally, the policy on funds attached by bank levy is to deny a request for the release of any funds until the outstanding balance has been satisfied. However, a couple of factors can be considered: PERSONAL TAX ISSUES - If a "substantiated hardship" exists, a partial release of funds may be negotiated. Full releases are rarely approved. BUSINESS TAX ISSUES - If an imposed levy would cause the taxpayer to miss a payroll or tax deposits, or some other similar hardship exists, negotiating a partial release may be possible. The taxpayer will be asked to provide documentation to support the hardship request. Full releases for businesses are also very rare. EVALUATING HARDSHIP REQUESTS Taxpayers should expect to provide supporting documentation showing how the levy is causing hardship. A taxpayer or representative can fax the information to the center. A manager will review the information and make a determination. Tax examiners do not have the authority to release any funds attached by bank levy. However, telephone assistors may release a wage levy if an alternative solution, most often an installment agreement, is accepted. A federal tax lien on real or personal property may be terminated in various ways. The lien is released when the tax liability is paid or the lien becomes legally unenforceable (as opposed to factually unenforceable). At the discretion of the district director, a lien may be released in exchange for an acceptable surety bond, as long as payment in full will be made no later than six months before the collections period ends. Reg. Section 301.6325-1(a)(2). The release is evidenced by a certificate of release. Reg. Section 301.6325-1(a). An IRS error in releasing a tax lien can result in a loss of priority for the lien. Even if the release is revoked, the reinstated lien has priority only from the date of the revocation. Reg. Section 301.6325- 1(f)(2)(iii)(a). As a result, other competing interests in the property that were subordinate to the original tax lien may gain priority over the governmental lien. The district director also has discretion to issue a certificate of discharge that releases all or a specific part of the property subject to the lien. Reg. Section 301.6325-1(b). Discharge is appropriate if the fair market value of the part of the property remaining subject to the lien is at least double the sum of the tax liability plus the amount of all other liens that have priority over the tax lien. Reg. Section 301.6325-1(b)(1)(i). EXAMPLE 1. The taxpayer requests a discharge of all property subject to a $1,000 tax lien except for land worth $10,000. The land is subject to a prior mortgage of $5,000 and a prior real property tax lien of $100. The sum of the tax liability and the senior liens is $6,100. The doubled amount is $12,200. Consequently, the other property will not be discharged. Reg. Section 301.6325-1(b)(1)(ii) Discharge of some of the taxpayer's property may be appropriate if the taxpayer makes part payment in an amount equal to or greater than the government's interest in the property. Reg. Section 301.6325- 1(b)(2)(i). If the government's interest in the property is valueless, the district director has the discretion to issue a discharge certificate without payment. For example, property subject to superior liens and having a forced sale value insufficient to cover those obligations might be discharged on this basis. Reg. Section 301.6325- 1(b)(2)(ii). The district director also has the power to discharge property, part of which is to be sold, and substitute the proceeds of the sale as the subject of the lien. Reg. Section 301.6325-1(b)(2)(ii). Under appropriate circumstances a federal tax lien may be subordinated to the interest of a competing lienor. For example, the lien may be subordinated to a new loan if the new loan proceeds are paid to the government, or in other circumstances if the district director believes that subordination of the tax liability will ultimately increase the amount realizable from the property in question. Subordination is likely to be approved for situations where additional credit is needed to cover products or expenses. PRACTICE TIP: the government will not allow subordination if liens, loans or expenses in addition to the subject will be satisfied ahead of the government's lien. EXAMPLE 2. $5,000 of cut timber that can be processed into more valuable products is under a federal tax lien of $7,000. A bank loan is necessary to finance the processing. If the lien is subordinated to the bank's operating loan, the final value of the timber products will exceed the cost of production, the loan cost, and the tax lien. Subordination of the tax lien is appropriate if the bank otherwise will not make the loan. Reg. Section 301.6325-1(d)(2)(ii). In summary, the IRS is likely to agree to discharge some of the property subject to a federal tax lien in four situations: (1) If, on a conservative estimate, the IRS finds that the fair market value of the property not discharged is at least double the amount of the tax liability plus all prior liens to which the property is subject. (2) If a part payment is made on the tax liability, in an amount determined by the IRS as a prerequisite to partial discharge (the amount may not be less than the value of the discharged part). (3) If the IRS determines that the interest of the government in the part to be discharged is valueless. (4) If the proceeds from a sale of part of the property are substituted for the property to be discharged, and the amount of the proceeds is equal to the lien amount. For an owner of property subject to a federal tax lien other than the taxpayer whose unsatisfied liability gave rise to the lien, an additional method is available to discharge the lien. Effective July 22, 1998, an owner (other than the taxpayer) may substitute money equal to the value of the lien on the property or furnish a bond acceptable to the Secretary, and receive a certificate of discharge of the property from the lien. The money will be refunded or the bond released if the Secretary determines that the tax liability can be satisfied from sources other than the property. If the nontaxpayer-owner does not file a wrongful levy action to contest the lien, the money may be applied or the bond collected to the extent it is needed to satisfy the liability. Code Section 6325(b)(4). If the IRS agrees to a discharge or partial discharge, it will issue a certificate of release or discharge. The certificate of release or discharge conclusively releases or discharges the lien on the property covered by the certificate. The IRS can revoke the certificate of release, however, if it determines that the certificate was erroneously or improvidently issued or was issued in connection with a compromise that has been breached. The IRS Chief Counsel has advised, however, that the revocation of a release of a lien on a taxpayer who has filed in bankruptcy would be a violation of the automatic stay provision of the Bankruptcy Code. The advice recommends seeking the lifting of the automatic stay prior to the revocation of a release. CCM 199921005. Revocation of a discharge certificate is subject to the statute of limitations on collections. Discharge of a lien for estate or gift taxes, however, may not be revoked. Reg. Section 301.6325- 1(f)(2)(i)(b). It is IRS procedure not to issue a certificate of release to a bankrupt taxpayer whose tax debt was not discharged in the bankruptcy proceeding. This rule also applies to bankrupt corporations, whose bankruptcy may have led to dissolution. The tax debt of a dissolved corporation becomes the responsibility of the individual shareholders to the extent of the value of any assets received from the corporation. PRACTICE TIP: Discharge may occur if: (1) The liened property has a fair market value of more than twice the tax liability plus all prior liens on the property; (2) the liened property is valueless; (3) partial payment of the tax liability justifies partial discharge; (4) the proceeds of the sale of part of the property are substituted for the property to be discharged, and the amount of the proceeds is equal to the lien amount; (5) an owner other than the taxpayer whose unsatisfied liability gave rise to the lien substitutes money or a bond for the value of the lien.
Code Section 6343 provides that the district director has authority to release a levy on all or part of the property or right to property levied upon. The 1988 amendments enacted as part of the Taxpayer Bill of Rights, effective for levies issued on or after July 1, 1989, greatly expanded the circumstances in which the IRS is compelled to release a levy. Prior to the amendments, release was at the discretion of the IRS if the levy was determined to be wrongful or if release would facilitate collection of the tax. <142> Since the 1988 amendments, the IRS is required to release a levy under certain statutorily-described circumstances. Code Section 6343(a)(1). In addition, if the return of property levied upon is in the form of a payment of money, the law now requires the government to pay the taxpayer interest (at the underpayment rate established by Code Section 6621) if the return results from a wrongful levy. Code Section 6343(c). The IRS has an affirmative duty to release a levy and notify the taxpayer of the release if any of five circumstances arises. Code Section 6343(a)(1). The taxpayer may request a release of the levy, but the determination with respect to the circumstances may be based on information from sources other than the taxpayer. Reg. Section 301.6343-1(a). Except in extraordinary circumstances, the request for the release of the levy must be made more than five days prior to a scheduled sale. Reg. Section 301.6343-1(c)(2). The levy must be released if: (1) The tax liability supporting the levy is satisfied or becomes unenforceable by lapse of time; (2) release of the levy will facilitate collection of the tax (one of the circumstances that, under prior law, gave the IRS the power to release the levy); (3) the taxpayer has entered into a Code Section 6159 agreement to satisfy the tax liability by installment payments, so long as a release would not jeopardize the government's secured creditor status; (4) the IRS has determined that the levy is creating an economic hardship due to the financial condition of the taxpayer; and (5) the fair market value of the property exceeds the liability, and the IRS could release the levy on part of the property without hindering collection of the tax. Code Section 6343(a). Release of the levy for any of these reasons will not prevent a subsequent levy on the property. Code Section 6343(a)(3). An expedited determination is provided if the levy is on tangible personal property "essential" in carrying on the taxpayer's trade or business. Code Section 6343(a)(2). The IRS is required to make an expedited determination if levy on essential business property "would prevent the taxpayer from carrying on" the taxpayer's trade or business. Code Section 6343(a)(2). The determination must be made within ten days of the request or within ten days of the receipt of any necessary supporting documentation. In all cases where a request for an expedited determination for release is made at least five days prior to a sale, the determination must be made prior to the sale. If necessary, the sale may be postponed. Reg. Section 301.6343-1(d)(1)(ii). If the Secretary determines that property has been wrongfully levied upon, there may be returned: the specific property levied upon; an amount of money equal to the amount of money levied upon; or an amount of money equal to the amount received from a sale of the property. Where the property returned is money, interest must be returned as well. Code Section 6343(c). A levy is wrongful if made on: exempt property; property the taxpayer has had no interest in since the lien arose; or if the levy or sale will effectively destroy or irreparably harm an interest senior to the tax lien. Reg. Section 301.7426-1(b)(1). Where release of the levy will facilitate collection, the district director may find that compliance with conditions other than immediate payment will ultimately facilitate the collection. Qualifying conditions may include: Reg. Section 301.6343-1(b)(2)(ii). (1) A satisfactory escrow arrangement; (2) a satisfactory bond; (3) payment of the amount of the government's interest in the property; and (4) an agreement extending the statute of limitations on collections. Release of a specific levy will not prevent subsequent levies if, for example, there is additional tax or the substituted security proves ineffective. Reg. Section 301.6343-1(e). The Secretary may also return the property or money in some situations other than a wrongful levy. If the Secretary determines that the levy was premature, or that collection will be facilitated, or where installment payments have been agreed upon, the property or money may be returned (but without interest). Code Section 6343(d). In the case of a levy imposed after December 31, 1999, on salary and wages, if the Secretary and taxpayer agree that the tax is not collectible, the levy must be released as soon as practicable. Code Section 6343(e). A person other than the taxpayer who has an interest in the property can maintain an action for wrongful levy in federal district court. The range of remedies in a third-party wrongful levy action is fairly broad and may include an injunction against a sale of the property, the return of the property, and a return of money. Code Section 7426(b). The civil action, then, provides for injunctive relief, return of the property, or a money judgment (with interest). Reg. Section 301.7426-1(b)(1). |
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