When Does the IRS Have to Withdraw Its Notice of Lien?

If you have a substantial tax debt, you may be considering your options to avoid a federal tax lien. Offers in compromise, installment payments, and other settlement options can help you resolve your tax debt. But at what point does the IRS have to withdraw its notice of lien?

What are the IRS Regulations for Withdrawal of Federal Tax Liens?

IRS officials, including settlement officers are guided in their decisions by the Internal Revenue Regulations. Those regulations say that the IRS “may withdraw a notice of federal tax lien” in four situations:

1. When the federal tax lien was premature or was not in accordance with the IRS’s administrative procedures,
2. After a taxpayer has entered into an installment agreement unless that agreement specifically says the tax lien will not be withdrawn,
3. If withdrawing its notice of lenient would facilitate tax collections
4. When doing so is in the best interest of the taxpayer and the United States

The regulations say “If the Commissioner determines that the conditions authorizing the withdrawal are not present, the Commissioner may not authorize the withdrawal.” As a recent Tax Court decision, Horsham v IRS, explains, this language means that the IRS may withdraw its notice of lien in these cases, but it doesn’t necessarily have to.

IRS Makes Inconsistent Statements about Federal Tax Liens

Joanne Horsham fell behind on her tax liabilities in 2017, 2018, and 2019, and the IRS assessed tax, penalties, and interest for those years. In February 2022, she made an offer in compromise (OIC), asking to pay less than the total amount owed. An IRS offer specialist said he would recommend rejecting that offer because he believed she could pay the full amount. He told Horsham that she could withdraw her offer, waive her appeal rights, and apply for an installment agreement instead, saying the IRS would file liens for the three tax years. She accepted that suggestion in February 2023, and formally withdrew the OIC in March 2023 and submitted an installment agreement. The offer specialist recommended that the IRS issue notices of federal tax liens, issued April 4, 2023, and accepted the installment agreement which, when completed, would pay off the full tax debt.

Horsham then filed a request for a Collections Due Process hearing, asking the IRS to withdraw its notice of lien because she had entered an installment agreement and the total amount owed was below $50,000. She said the IRS’s appeals settlement officer (SO) had told her the IRS would not file a notice of federal lien as long as she complied with the installment agreement.

At the hearing, the SO asked Horsham if the tax lien had any adverse impact on her. She had avoided asking her employer, a bank, to avoid drawing attention to her tax problems. Based on this lack of adverse consequences, the IRS entered a determination declining to withdraw its tax lien and reinstating the installment agreement instead. Horsham filed a petition in the United States Tax Court appealing that decision.

Is Refusing to Withdraw Its Notice of Lien an Abuse of the IRS’s Discretion?

The Tax Court did not reverse the IRS’s decision, finding the IRS’s refusal to withdraw its notice of lien was not an “abuse of discretion.” As the Tax Court explained, “We do not substitute our judgment for that of the SO as to whether an NFTL filing should be withdrawn.” Instead, it would need to determine that the IRS’s action was “arbitrary, capricious, or without sound basis in fact or law.” This is the hardest standard for the taxpayer to meet. The decision is based on whether the SO:

1. “properly verified that the requirements of applicable law or administrative procedure were met,
2. considered relevant issues the petitioner raised, and
3. considered ‘whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of [petitioner] that any collection action be no more intrusive than necessary.’”

Horsham said her earlier installment agreement meant the IRS had to withdraw its tax lien. However, the regulations (quoted above) say the IRS “may” withdraw a tax lien when an installment agreement is entered, not that it “must” do so.

Next, she argued that withdrawing its tax lien would “facilitate the collection of tax liability.” However, the Tax Court agreed with the IRS that Horsham had not presented evidence of any adverse effect on her employment or financial situation.

The Tax Court was sympathetic with Horsham, since she had relied on the IRS’s inconsistent statements about its intent to issue a notice of federal tax lien. But it could not say the IRS abused its discretion by refusing to withdraw its tax lien. It suggested that Horsham could file a new request for a “consolidation loan” to pay off the tax liability early, and said it was likely the tax lien would be withdrawn once her liability dropped below $25,000 before the end of the year.

This decision shows just how much discretion the IRS has to keep its own promises when negotiating with taxpayers. If you owe a significant tax debt, you should work with an experienced tax attorney who can advise about the limits of the IRS’s regulations, and its’ authority to withdraw its tax lien later on.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 35 years experience. If you have questions about contesting an IRS tax liens or collections efforts, contact Joe Viola to schedule a free consultation.