Once imposed, Federal tax liens threaten the taxpayer’s ability to continue in business, since creditors and potential purchasers may then shun dealings with the taxpayer. Tax levies may be even worse, since they result in the immediate deprivation of the taxpayer’s property. The seriousness of these IRS measures literally forces the taxpayer to take some action, even if he has been dormant during the pendency of IRS assessment and collection procedures.
The IRS and the courts are generally unwilling to entertain the taxpayer’s substantive legal arguments that the tax lien or levy is improper. However, relief may be predicated on other grounds, including hardship, gross IRS error, or procedural defects. Relief may take the form of agreements between the IRS and the taxpayer to permit payment to be made in installments. Occasionally, the IRS may release a tax lien if such an action would ultimately increase the likelihood of payment.
Taxpayers who have responded to IRS notices but have received no acknowledgment from the IRS may petition the Problems Resolution Office for a “taxpayer assistance order.” Such an order may be granted where the taxpayer will suffer “significant hardship” on account of the manner in which the internal revenue laws are being administered. Although such an order, if granted, is provisional in nature, it will serve to freeze any further IRS action pending review of the taxpayer’s problem.
At times, the taxpayer may concur with the I.R.S. with respect to taxes owed, but may be genuinely unable to pay. Recognizing that filing a notice of lien against the taxpayer’s property may adversely affect the taxpayer’s ability to pay, the Service may consider entering into a collateral agreement with the taxpayer, whereby the government’s interests are protected, but the taxpayer is allowed to stay in business. The installment agreement is one type of collateral agreement. Specifically sanctioned by the Code, this arrangement permits the taxpayer to satisfy a tax liability in installments where the I.R.S. determines that such an agreement will “facilitate collection” of the liability.
Another type of collateral agreement is the “offer in compromise.” This arrangement, which also finds its origins in the Code, permits the taxpayer to satisfy an outstanding tax liability for less than the full amount of the liability. The taxpayer who wishes to avail himself of an offer in compromise must furnish the Service with financial statements and other data, from which the Service may evaluate the taxpayer’s offer.
An offer in compromise may be predicated either upon the taxpayer’s inability to pay, or much less frequently, upon a doubt as to the underlying tax liability. (Recall that even if faced with a tax lien, the taxpayer may satisfy the lien and then sue for a refund in the U.S. District Court.) A taxpayer who is truly insolvent and appears unlikely to improve on that status may be an ideal candidate for an offer in compromise, since in evaluating the offer, the I.R.S. must act like a “prudent businessperson.”
Tax liens may be filed erroneously. The Code requires that a lien be released where the liability has been fully satisfied, the liability has become legally unenforceable (e.g., the statute of limitations), or an acceptable bond has been furnished by the taxpayer. If any of these conditions is met, the Service must release the lien within 30 days of the taxpayer’s written application.
Prior to seizure of the taxpayer’s property by levy, the taxpayer may challenge procedural deficiencies in court. Since declaratory judgments are generally precluded in tax matters, the better choice is to bring a quiet title action to determine whether there is a procedural defect in the government’s lien. The merits of a tax liability may not be raised in a quiet title action. One class of allegations often alleged by the taxpayer in such a proceeding involves mistakes in the mailing of the “notice of deficiency,” which apprises the taxpayer of the government’s proposed tax assessment.
Even if a levy has been commenced, the taxpayer may request that the levy be released, on the condition that he (1) furnish the I.R.S. with a satisfactory bond, (2) enter into an installment payment agreement, or (3) execute an assignment of salary or wages.
If release of levy may not be predicated upon any of the above conditions, the taxpayer may have no alternative but to seek relief in the courts. However, the purview of the courts in this area is circumscribed: The Anti-Injunction Act bars any suit which seeks to restrain “the assessment and collection of any tax.” Nevertheless, this language has been interpreted as not to bar actions where relief is predicated upon procedural grounds. The taxpayer may seek an injunction against the government to prohibit the enforcement of a levy where the procedural requirements of the Code have not been followed.
Even in situations where a literal failure to comply with procedural requirements may not warrant initiation of a judicial proceeding, the Service may be more willing to negotiate with the taxpayer concerning the underlying tax liability where the taxpayer’s representative expresses to the Service an awareness of these deficiencies.