Whether a tax debt becomes public depends on whether the IRS has instituted collection procedures, such as filing a lien or an order to garnish wages. The Internal Revenue Service (“IRS”) is a public agency therefore when it files a lien against a taxpayer’s property; it is required to publish a notice of lien to alert other potential creditors that the IRS has a claim against this particular property. However, not every type of IRS debt is publicly available.
The IRS has two primary tools to collect unpaid taxes: garnishing wages and imposing liens. Both of these tools can become public knowledge due to the way they function. However, not every debt that the IRS has a right to collect is necessarily public knowledge. For instance, the IRS has billions of dollars of debt that is currently not collectible because the taxpayer lacks the income prospects to repay the debt. Furthermore, debts that are being processed are not public knowledge (until the IRS institutes collection procedure).
IRS Processing of Tax Debts
Before an IRS debt becomes public, it goes through the full examination and ruling phase. In the examination phase, a tax return is audited, and the IRS sends letters to the taxpayer explaining what is disallowed or what tax deduction or credit for which the IRS needs paperwork to substantiate it. Once the letters are ignored or responded to, but it is unable to reach a compromise with the taxpayer, the controversy proceeds to the hearing phase.
During a hearing, the taxpayer may present arguments to the Administrative Law Judge (“ALJ”) and the IRS may counter. The ALJ will issue a ruling granting the IRS the authority to collect on the debt. Finally, the IRS can begin collection procedures (assuming the taxpayers doesn’t appeal the decision to the District Court – i.e. federal court). It also bears mentioning that the taxpayer may settle with the IRS at any point in this process.
Collection Tools: The Debt Becomes Public
As discussed above, the IRS has two tools to recover debts (1) liens and (2) garnishment. Another favorite technique includes intercepting the past and future tax refunds until the debt is satisfied. A lien is a legal claim against the taxpayer’s current and future property. Once the taxpayer refuses to satisfy the debt, the lien is created and attached to the property by operation of law – it is usually recorded in the County Office in which the taxpayer resides.
Once a lien is issued, the IRS publishes a “Notice of Federal Tax Lien” to give notice to other potential creditors. At this point, the debt is publicly available. The Notice is filed with the County Recorder and with the State Secretary of State. Furthermore, the Notice is reported by the credit reporting agencies.
At this point, landlords, employers, car salespeople, and banks can find the Notice and use it to influence their decision regarding the taxpayer. However, there are ways to release a Notice, including:
- Paying the debt in full;
- Guaranteeing the debt with a bond;
- File an Offer in Compromise, and it is accepted;
- The period for collections has ended (in the IRS’s case, the release should be automatic).
If a tax debt is “released” that means the IRS has both wiped the tax debt and cleared the Notice of Tax Lien.
The IRS may also “withdraw” a lien. If a lien is withdrawn, it is no longer in the public record. The IRS withdraws a lien to inform other creditors that it is abandoning its lien claims (however the lien remains active and could be collected on in the future). The IRS will withdraw a Notice if:
- The Taxpayer is paying down the debt pursuant to an installment agreement;
- The IRS determined it will help the taxpayer pay the taxes more quickly;
- The IRS violated its procedures;
- It is in the best interests of the government; and
- It was filed during a bankruptcy automatic stay period.
Finally, taxpayers can apply to “discharge” the lien. A typical example occurs when the taxpayer sells the property, and the debt is satisfied by the sale.
Long-Term Impact of IRS Tax Debts
The IRS is an institution, and like any institution, it can be worked with and understood. However, the IRS enjoys historically low approval ratings among the American people which mean it is poorly understood and feared – a dangerous combination for anyone trying to understand their latest IRS letter.
The long-term impacts of tax debts on businesses and individuals are severe. The standard statute of limitations to collect on debt is ten years (it can extend if fraud is discovered). Therefore, debts can follow a person for years before they are finally discharged by the time limit. Additionally, tax debts cannot be discharged by bankruptcy court (but the IRS is usually willing to negotiate a reduced settlement).