Most Serious Problems — Notices of Federal Tax Lien (NFTL)112
Legislative
Recommendations
Most Serious
Problems
Most Litigated
Issues
Case Advocacy Appendices
MSP
#11
NOTICES OF FEDERAL TAX LIEN (NFTL): The IRS Files Most
NFTLs Based on Arbitrary Dollar Thresholds Rather Than on a
Thorough Analysis of a Taxpayer’s Financial Circumstances and
the Impact on Future Compliance and Overall Revenue Collection
RESPONSIBLE OFFICIALS
Deborah Holland, Commissioner, Wage and Investment Division
Karen Shiller, Commissioner, Small Business/Self-Employed Division
Janice Hedemann, Acting Director, Office of Research, Analysis and Statistics
TAXPAYER RIGHTS IMPACTED
1
The Right to Challenge the IRS’s Position and Be Heard
The Right to Privacy
The Right to a Fair and Just Tax System
DEFINITION OF PROBLEM
Notices of Federal Tax Lien (NFTLs) establish priority of the government’s interest in a tax debtor’s
property with respect to certain creditors by putting the public, including third-party creditors, on notice
of an existing statutory lien.
2
Several TAS studies show that NFTLs can unnecessarily harm taxpayers and
reduce their ability to become or remain compliant with their federal tax filing obligations.
3
NFTLs also
generate significant downstream costs for the government, often without attaching to any tangible assets.
4
The IRS files most NFTLs based on an arbitrary dollar threshold of the unpaid liability, with over 21
percent of NFTLs filed without human involvement in determining lien filings,
5
rather than a thorough
analysis of the taxpayer’s individual circumstances and financial situation or consideration of the NFTL’s
impact on future compliance and collected revenue. Even when the taxpayer attempts to initiate contact
with the IRS by calling the number provided on the majority of notices, only about one in three taxpayers
can get through to the IRS to make payment arrangements prior to the NFTL filing.
6
1
See Taxpayer Bill of Rights, available at www.TaxpayerAdvocate.irs.gov/taxpayer-rights.
2
Internal Revenue Code (IRC) §§ 6321, 6322, and 6323(a).
3
In fiscal years (FYs) 2009-2012, TAS Research & Analysis investigated the IRS’s use of NFTLs and their impact on the compli-
ance behavior of delinquent taxpayers. See National Taxpayer Advocate 2012 Annual Report to Congress vol. 2, 105-30 (TAS
Research Study: Investigating the Impact of Liens on Taxpayer Liabilities and Payment Behavior); National Taxpayer Advocate
2011 Annual Report to Congress vol. 2, 91-111 (TAS Research Study: Estimating the Impact on Liens on Taxpayer Compliance
Behavior and Income); National Taxpayer Advocate 2010 Annual Report to Congress vol. 2, 89-100 (Estimating the Impact of
Liens on Taxpayer Compliance Behavior: An Ongoing Research Initiative); National Taxpayer Advocate 2009 Annual Report to
Congress vol. 2, 1-18 (TAS Study: The IRS’s Use of Notices of Federal Tax Lien).
4
See T. Keith Fogg, Systemic Problems with Low-Dollar Lien Filing, 2011 TNT 194-9 (Oct. 6, 2011); National Taxpayer Advocate
2011 Annual Report to Congress 109-28 (Most Serious Problem: Changes to IRS Lien Filing Practices Are Needed to Improve
Future Compliance, Increase Revenue Collection, and Minimize Economic Harm Inflicted on Financially Struggling Taxpayers).
5
IRS Collection Activity Report (CAR), NO-5000-25, Lien Report, September, FY 2015. In FY 2015, there were 515,247 liens
filed, including 4,918 refiled liens, with 202,127 arising in the Automated Collection System (ACS). Approximately 47 percent,
of ACS NFTLs are filed manually. Small Business/Self-Employed (SB/SE) response to TAS information request (Oct. 19, 2015);
IRS CAR, NO-5000-25, Lien Report, September, FY 2015.
6
IRS Joint Operations Center (JOC), Snapshot Reports: Enterprise Snapshot (week ending Sept. 30, 2015) (specifying that 37
percent level of service for the installment agreement line).
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The National Taxpayer Advocate has repeatedly expressed concerns regarding the negative impact of the
IRS’s NFTL filing policies on taxpayers and on future compliance.
7
The IRS can significantly increase the
effectiveness of NFTL filings without needlessly harming taxpayers by replacing the current policy with a
cost-efficient algorithm for making NFTL filing determinations incorporating:
meaningful contact with the taxpayer to obtain financial information and establishing a payment
plan;
thorough analysis of the taxpayer’s financial situation, including whether the NFTL will attach to
tangible property; and
the impact of the NFTL on future compliance.
ANALYSIS OF PROBLEM
Background
The IRS’s ability to file a NFTL, which protects the government’s interest in property against subsequent
purchasers, secured creditors, and junior lien holders, is a power unlike that of other creditors, since the
IRS does not need to obtain a judgment to file a NFTL.
8
The filing of a NFTL can significantly damage
the creditworthiness of a taxpayer, which can negatively impact the ability to obtain financing for a home
or other major purchases, find or maintain a job, secure affordable rental housing or insurance, and pay
the tax debt.
9
Congress recognized the unique nature of a NFTL and, when enacting the IRS Restructuring and Reform
Act of 1998 (RRA 98), it precluded the IRS from “abusively us[ing] its liens and seizure authority.”
10
Upon assessment of a tax liability, notice to the taxpayer, demand for payment, and the taxpayer’s failure
to pay, a lien in favor of the United States attaches to the taxpayer’s property.
11
This statutory lien, known
as a “secret lien” because the taxpayer does not usually know it has arisen, attaches to all of the taxpayer’s
property and rights to property, both real and personal, and to any future property acquired by the
taxpayer.
12
However, this “secret lien” does not provide the IRS with priority over other creditors that do
not have actual knowledge of the secret lien; thus, the IRS must file an NFTL to establish priority of the
7
See, e.g., National Taxpayer Advocate 2014 Annual Report to Congress 225-36 (Most Serious Problem: Managerial Approval
for Liens: The IRS’s Administrative Approval Process for Notices of Federal Tax Liens Circumvents Key Taxpayer Protections in
RRA 98); National Taxpayer Advocate 2012 Annual Report to Congress 403-25 (Most Serious Problem: Although the IRS “Fresh
Start” Initiative Has Reduced the Number of Lien Notices Filed, the IRS Has Failed to Determine Whether Its Lien Policies Are
Clearly Supported by Either Increased Taxpayer Compliance or Revenue); National Taxpayer Advocate 2011 Annual Report to
Congress 109-28 (Most Serious Problem: Changes to IRS Lien Filing Practices Are Needed to Improve Future Compliance,
Increase Revenue Collection, and Minimize Economic Harm Inflicted on Financially Struggling Taxpayers).
8
IRC §§ 6321, 6322, and 6323(a).
9
See National Taxpayer Advocate 2014 Annual Report to Congress 225; see also Heather Struck, A Bad Credit Score Affects
a Lot More Than Credit, foRBes, Jul. 20, 2011, available at http://www.forbes.com/sites/heatherstruck/2011/07/20/credit-
score-fico-can-hurt-you/; written response from Vantage Score® (Sept. 17, 2009).
10
RRA 98, Title III, § 3421, Pub. L. No. 105-206, 112 Stat. 758 (1998). See also S. ReP. No. 105-174, at 78 (1998);
Unanimous Consent Request – H.R. 26767, 143 Cong. Rec. S12230-02, at S12231 (statement of Senator Roth).
11
IRC §§ 6321 and 6322. IRC § 6201 authorizes the IRS to assess all taxes owed, and IRC § 6303 provides that within 60
days of the assessment, the IRS must provide notice and demand payment to any taxpayer liable for an unpaid tax.
12
Id. Internal Revenue Manual (IRM) 5.12.1.3, Creation and Duration (Oct. 14, 2013). The NFTL is effective as of the date of
assessment and continues until the liability is either paid in full or is legally unenforceable. The IRS must release the lien
within 30 days after the underlying liability is satisfied or becomes legally unenforceable. IRC § 6325(a)(1). Because the NFTL
is a statutory lien — or “secret” lien — third parties have no knowledge of the existence of the underlying debt. IRC § 6321.
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government’s interest in the property against subsequent purchasers, secured creditors,
and junior lien holders.
13
In 2011, in response in part to the National Taxpayer Advocate’s continued concern
over NFTL filing and withdrawal policies, the IRS announced a new effort to help
financially struggling taxpayers get a “fresh start.”
14
The “Fresh Start Initiative”
resulted in several positive changes in how the IRS files and withdraws NFTLs,
including increasing the Automated Collection System (ACS) NFTL filing threshold
from $10,000 to $25,000.
15
However, the IRS continues to file NFTLs automati-
cally based on that threshold, with little management review and without attempting
meaningful contact with a taxpayer, doing a financial analysis, or considering the
impact on future compliance.
16
Current NFTL Filing Policy Is Based on an Arbitrary Dollar Threshold of
the Unpaid Liability Rather Than Focused on Meaningful Contact with
the Taxpayer
As stated above, the IRS generally files NFTLs if the aggregate unpaid balance of as-
sessment is over $10,000, or for accounts in ACS, if the assessment is over $25,000.
17
Contrary to congressional intent, only the decision to not file an NFTL requires
managerial approval in most circumstances.
18
Prior to the filing of an NFTL, the
IRS must make “reasonable efforts” to contact the taxpayer to “advise [the taxpayer]
that an NFTL may be filed if full payment is not made when requested.”
19
However,
the Internal Revenue Manual (IRM) provides that “reasonable effort” includes “is-
suance of the statutory assessment notices and the balance due notices sent during
13
See IRC § 6323(f); Treas. Reg. § 301.6323(f)-1; IRM 5.12.1.4, Purpose and Effect of Filing a Notice of Federal Tax Lien (NFTL)
(Oct. 14, 2013). The IRS must file the NFTL in the correct county or jurisdiction where the taxpayer’s property is located.
14
IRS, Media Relations Office, IRS Announces New Efforts to Help Struggling Taxpayers Get a Fresh Start; Major Changes to Lien
Process, IR-2011-20 (Feb. 24, 2011).
15
National Taxpayer Advocate 2012 Annual Report to Congress 408. The IRS implemented this change through a policy decision
that reprogrammed ACS to file NFTLs only where the unpaid balance of assessment is over $25,000. However, the IRS did not
update the IRM or issue interim guidance reflecting this change.
16
National Taxpayer Advocate 2014 Annual Report to Congress 225-36 (Most Serious Problem: Managerial Approval for Liens:
The IRS’s Administrative Approval Process for Notices of Federal Tax Liens Circumvents Key Taxpayer Protections in RRA 98).
17
See IRM 5.12.2.6(1) (Oct. 14, 2013); IRM 5.19.4.5.3, NFTL Filing Decisions (Aug. 4, 2014); see also supra note 15 (noting
that the $25,000 threshold is not listed in the IRM nor in interim guidance but is an established policy decision); SB/SE
response to TAS information request (June 10, 2015) (stating that on April 15, 2011, the “ACS Systemic Lien threshold was
increased to $25,000”).
18
National Taxpayer Advocate 2014 Annual Report to Congress 226, 229. As described in the 2014 Annual Report, despite
the congressional direction that the IRS adopt procedures in which an employee’s determination to file a NFTL would, “where
appropriate,” be approved by a supervisor in RRA 98 § 3421, the IRS’s current policy is to only have those reviews take place
when the determination is to not file a NFTL or if the Revenue Officer is below a full performance level of GS-9. See RRA
98, Title III, § 3421, Pub. L. No. 105-206, 112 Stat. 758 (1998); Memorandum from Assistant Commissioner (Collection)
(July 30, 1998) (concluding that RRA 98 § 3421 does not require supervisory review of all collection actions but allows the
IRS the discretion to determine where such review would be appropriate); IRM 5.12.2.5.2(1) (Oct. 14, 2013). Furthermore,
IRM 5.12.2.5.3(2) (Nov. 9, 2015) provides that managerial approval is required for the non-filing or deferral of an NFTL filing
when the “known aggregate assessed or to be assessed balance will be greater than $10,000,” there are ten or more mod-
ules open, or the “NFTL filing is deferred or not filed for more than 120 days from initial or last [taxpayer] contact,” including
“situations when the Revenue Officer is waiting for either actions by or documentation from a taxpayer.” The only exceptions
to managerial approval are limited to cases in which the balance is less than $2,500, there has previously been a non-filing
or deferral approval in the case and circumstances remain the same, the case meets the Streamline Installment Agreement
criteria under IRM 5.14.5.2, or the case meets the criteria for specifically not filing an NFTL under IRM 5.12.2.4.2(2) or
5.12.2.4.2(3). IRM 5.12.2.5.3(1) (Nov. 9, 2015).
19
IRM 5.12.2.2(1) (Nov. 9, 2015).
The filing of a Notice of
Federal Tax Lien (NFTL)
can significantly damage
the creditworthiness of
a taxpayer, which can
negatively impact the
ability to obtain financing
for a home or other
major purchases, find or
maintain a job, secure
affordable rental housing
or insurance, and pay the
tax debt.
Taxpayer Advocate Service — 2015 Annual Report to Congress — Volume One 115
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the collection process ….”
20
This guidance suggests the IRS is simply “checking the box” on contacting
taxpayers without actually attempting meaningful contact to resolve the tax liability.
Under current procedures, the request for an NFTL filing or the appropriate non-filing documenta-
tion must be prepared within ten calendar days of the initial attempted contact or the initial actual
contact with the taxpayer or his or her representative.
21
A “contact,” as defined in the IRM, is made by
either a field contact, the preferred method for Revenue Officers; a telephone call; or mailing a notice
or letter to the taxpayer’s last known mailing address.
22
As Figure 1.11.1 below illustrates, a majority of
these attempted telephone calls by ACS using predictive dialers do not result in actual contact with the
taxpayers.
23
FIGURE 1.11.1
24
Percentage of Predictive Dialer Outbound Calls in the
Automated Collection System (ACS) That Resulted in “No Contact”
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
50%
69%
46%
71%
66%
65%
55%
60%
71%
62%
57%
79%
Small Business/
Self-Employed ACS
Wage &
Investment ACS
This ten-day timeframe is an incredibly short period to allow any “meaningful contact” to occur, let alone
enable the taxpayer to provide the IRS with a clear picture of his or her current financial situation. The
IRS does not take into account the amount of time it takes for the taxpayer to contact the IRS and gather
and send the necessary financial information or for the IRS to process and deliver that information.
25
20
IRM 5.12.2.2(1) (Nov. 9, 2015).
21
IRM 5.12.2.3.2(1) (Oct. 14, 2013). The NFTL determination is separate from the NFTL filing consideration. The ten-day pre-
filing consideration is a process of deciding whether to file, defer, or not file, an NFTL. IRM 5.12.2.3(1) (Oct. 14, 2013).
22
IRM 5.12.2.2(2) (Nov. 9, 2015). The IRS does not systemically track how often each “contact” method is utilized. See SB/SE
response to TAS information request (Nov. 6, 2015).
23
SB/SE response to TAS information request (June 10 and Oct. 19, 2015).
24
Id. This does not include the limited number of “manual outbound calls” initiated by an ACS employee working an ACS case.
25
Over half of Accounts Management correspondence inventories are in “overage,” meaning they have not been handled in the
established timelines. See IRS, Customer Account Services Accounts Management Paper Inventory Reports, Inventory Age
Report – All Programs (week ending Sept. 30, 2015) (noting that 54 percent of Individual Master File Correspondence is in
“overage”).
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And, all this assumes the taxpayer receives correspondence about the NFTL and it is not returned to the
IRS as undeliverable mail.
26
Additionally, even if the taxpayer receives a notice or a phone message and attempts to call the IRS back
at the number provided on the majority of notices, it is unlikely he or she will get through to the IRS to
make payment arrangements prior to going into ACS. In fiscal year (FY) 2015, the level of service (LOS)
for the Installment Agreement/Balance Due phone number was less than 40 percent.
27
Because of the
poor level of service on the payment phone line, the IRS may view taxpayers as being unwilling to pay
when they were actually trying to reach the IRS to set up payment plans. Consequently, given the short
timeframes for taxpayer response, the IRS files NFTLs against taxpayers who are trying to reach the IRS
but cannot. This situation not only harms taxpayers but also erodes trust in the IRS and can undermine
future compliance.
The IRS Could Learn From Meaningful Contact Practices in the Financial Industry and
Other Tax Administration Agencies
The National Taxpayer Advocate has continuously discussed the importance and usefulness of mean-
ingful contact, specifically personal contact, rather than simply mailing letters and providing taxpayers
with information regarding their payment options.
28
In the private sector, creditors routinely use early
intervention as a pre-collection mechanism.
29
It has become a standard in the mortgage industry for loan
servicers to contact borrowers at least twice within the first 45 days of delinquency to discuss potential loss
26
See National Taxpayer Advocate 2013 Annual Report to Congress 157; National Taxpayer Advocate 2010 Annual Report to
Congress 221-32 (Most Serious Problem: The IRS Has Not Studied or Addressed the Impact of the Large Volume of Undelivered
Mail on Taxpayers).
27
IRS JOC, Snapshot Reports: Enterprise Snapshot (week ending Sept. 30, 2015). The customer service representative (CSR)
level of service for the Installment Agreement/Balance Due phone number in FY 2015 was approximately 37 percent. Id.
Overall, taxpayers have to wait a significant amount of time on hold to actually speak with an assistor, and almost 18 million
callers were disconnected via a “courtesy disconnect” message. See IRS, JOC, Custom Report RRC 2015-1623 (including
weekly data on the number of courtesy disconnects from FYs 2011 to 2015) (noting that 4,853,347 courtesy disconnects
occurred in the “individual category” alone for FY 2015). The SB/SE ACS number, 800-829-3903, and the W&I ACS number,
800-829-7650, do have a significantly higher level of service, over 70 percent, but the taxpayer is not provided this number
until after he or she has entered into ACS and the NFTL may have already been filed by ACS. IRS JOC, Snapshot Reports:
Enterprise Snapshot (week ending Sept. 30, 2015). For ACS incoming calls in FY 2015 the average handle time was 16.2
(W&I) to 16.5 (SB/SE) minutes and an average queue time of 12.8 (SB/SE) to 14.5 (W&I) minutes. SB/SE response to TAS
information request (Oct. 19, 2015).
28
National Taxpayer Advocate 2011 Annual Report to Congress 336-47 (Most Serious Problem: The IRS Does Not Emphasize
the Importance of Personal Taxpayer Contact as an Effective Tax Collection Tool); National Taxpayer Advocate 2010 Annual
Report to Congress vol. 2, 40-70 (TAS Research Study: An Analysis of the IRS Collection Strategy: Suggestions to Increase
Revenue, Improve Taxpayer Service, and Further the IRS Mission); National Taxpayer Advocate 2009 Annual Report to Congress
17-40 (Most Serious Problem: One-Size-Fits-All Lien Filing Policies Circumvent the Spirit of the Law, Fail to Promote Future Tax
Compliance and Unnecessarily Harm Taxpayers); National Taxpayer Advocate 2008 Annual Report to Congress 114-25 (Most
Serious Problem: Navigating the IRS); National Taxpayer Advocate 2006 Annual Report to Congress 62-82 (Most Serious
Problem: Early Intervention in IRS Collection Cases), 83-109 (Most Serious Problem: IRS Collection Payment Alternatives),
110-29 (Most Serious Problem: Levies), 141-56 (Most Serious Problem: Collection Issues of Low Income Taxpayers); National
Taxpayer Advocate 2004 Annual Report to Congress 226-45 (Most Serious Problem: IRS Collection Strategy). The National
Taxpayer Advocate has also discussed in detail the impact of future compliance with meaningful contact in her prior reports.
See National Taxpayer Advocate 2014 Annual Report to Congress 225-35 (Most Serious Problem: Managerial Approval For
Liens: The IRS’s Administrative Approval Process for Notices of Federal Tax Lien Circumvents Key Taxpayer Protections in RRA
98); National Taxpayer Advocate 2012 Annual Report to Congress 403-25 (Most Serious Problem: Although the IRS “Fresh
Start” Initiative Has Reduced the Number of Lien Notices Filed, the IRS Has Failed to Determine Whether Its Lien Policies Are
Clearly Supported by Either Increased Taxpayer Compliance or Revenue).
29
See, e.g., National Service Bureau, Pre-Collection Services (Early Intervention), available at http://www.nsbi.net/early-out-pre-
collect (last visited Dec. 4, 2015).
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mitigation options available.
30
The Real Estate Settlement Procedures Act requires
that the first contact, which must take place by the 36th day of delinquency, is a
“live contact,” or at least a good faith effort for live contact.
31
Furthermore, tax
administration agencies around the world, including Sweden, Australia, Norway,
and New Zealand, successfully use reminders, specifically “gentle” reminders,
to increase tax payment compliance and prevent enforcement measures.
32
For
example, New Zealand saw an increase of on-time payments by 12.6 percent
between 2010 and 2013 by simply using short message service (SMS) to provide
real-time reminders of key payments to a targeted group of taxpayers.
33
Meaningful and personal contact, such as a “soft” letter followed by a telephone
call, sends a timely message to a taxpayer. Often a reminder is all that is neces-
sary to resolve past-due debts prior to placing them in full collection. It would be
beneficial for the IRS, in terms of saving NFTL filing fees and promoting taxpayer
rights and future compliance, to make multiple attempts to contact taxpayers by
phone and through mailing monthly reminder notices (or SMS) instead of filing
an NFTL after just one attempt. The IRS could use technology, such as a predic-
tive dialer system, to reach taxpayers proactively and utilize third-party databases,
such as LexisNexis
®
Accurint, to find alternative numbers and addresses associated
with taxpayers.
34
However, given the current LOS and limited ability for taxpay-
ers to reach the IRS via telephone, the IRS should expand the ten-day time frame
to enable it to make meaningful contact with the taxpayer before making lien
determinations.
35
A Thorough Analysis of the Taxpayer’s Financial Situation Is Necessary to Make an
Accurate NFTL Filing Determination
NFTLs are currently filed pursuant to strict business rules as opposed to a thorough review of the tax-
payer’s financial situation. It was not until 2013, after consistent criticism from TAS, that the IRS added
30
The Consumer Financial Protection Bureau has incorporated the need for early contact with delinquent debtors in the 2013
updated mortgage servicing rules by requiring loan servicers to contact borrowers at least twice within the first 45 days of
delinquency and discuss potential loss mitigation options available, if appropriate. See 12 C.F.R. § 1024.39; Mortgage
Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X), 78 Fed. Reg. 10696, 10787-10807 (Feb. 14,
2013).
31
Id.
32
See OECD, woRkINg smaRTeR IN Tax deBT maNagemeNT 44 (2014), available at http://www.keepeek.com/Digital-Asset-Management/
oecd/taxation/working-smarter-in-tax-debt-management_9789264223257-en#page1. The use of reminders, specifically “gen-
tle” reminders, has proven to be successful in increasing tax payment compliance and preventing enforcement measures in
both Sweden and Australia. Id. Norway has seen a reduction in the need for “attachments” by 30 percent and a decrease in
unsatisfied callers simply by sending gentler reminders.
33
Id. at Table 3.3 (2014) (stating that New Zealand saw an increase in on-time payments from 72 percent to 84.6 percent
between 2010 and 2013 due to the use of SMS reminders to targeted groups of taxpayers).
34
Predictive dialer is a computer-based system that automatically dials groups of telephone numbers and then passes live
calls to available CSRs. See, e.g., SpitFire Predictive Dialers, available at http://www.tmcnet.com/channels/predictive-dialer/
(last visited Dec. 4, 2015). See also National Taxpayer Advocate 2012 Annual Report to Congress 526-36 (Legislative
Recommendation: Amend IRC § 7701 to Provide a Definition of “Last Known Address,” and Require the IRS to Mail Duplicate
Notices to Credible Alternative Addresses); LexisNexis® Accurint, available at http://accurint.com/ (last visited Dec. 4, 2015).
The IRM does instruct employees to “research” within 14 days to determine if there is a more current address available for re-
issuance of the notice. See IRM 5.19.6.17.4(1) (Oct. 15. 2014).
35
See supra note 27.
Because of the poor level
of service on the payment
phone line, the IRS may
view taxpayers as being
unwilling to pay when they
were actually trying to reach
the IRS to set up payment
plans. Consequently, given
the short timeframes for
taxpayer response, the IRS
files Notices of Federal
Tax Liens (NFTLs) against
taxpayers who are trying to
reach the IRS but cannot.
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the lien determination pre-filing considerations to the IRM to assist employees in deciding whether to file
an NFTL.
36
The pre-filing considerations include:
(1) the taxpayer compliance history;
(2) taxpayer qualification for a determination exception;
(3) protection of the government’s interest, including exigent circumstances, where the filing of an
NFTL is necessary to protect those interests; and
(4) taxpayer’s qualification for a determination that a NFTL filing will hamper collection.
37
To ensure that the IRS is balancing the need to protect the government’s interest with the taxpayer’s right
that the collection action be no more intrusive than necessary,
38
the IRS should complete a thorough
analysis of the taxpayer’s financial situation when it makes a lien determination.
39
At minimum, the
IRS should complete a limited analysis of the taxpayer’s financial situation, using a form similar to the
Form 433-F, Collection Information Statement, to determine if the taxpayer has assets currently or will
have assets in the foreseeable future.
40
The IRS files approximately 21 percent of NFTLs automatically
without human involvement in determining lien filing.
41
Even in an automated environment, it should
develop an automated basic financial analysis for NFTL filing determinations, through the use of credit
scoring and automated asset verification, while elevating close call or complex cases to an employee.
Using Technology and Databases to Improve Financial Analyses
The IRS is “one of the largest financial institutions in the world,”
42
but it is reluctant to implement
financial analysis techniques and certain automation techniques used by modern financial institutions,
including financial scoring, credit risk analysis, and modeling. Several large credit scoring and credit
analysis providers offer solutions to automate collection decisions.
43
For example, LexisNexis® RiskView
™
Solutions and Accurint
®
for Collections: Decision Workflow enables financial institutions and other creditors
to access data from thousands of public sources to find court records, assets, and licenses, which can be
factored into the determination of ability to repay, eligibility for a repayment plan, and recommendation
of payoff amounts based on a comprehensive analysis of credit risk management data.
44
The IRS can
employ new techniques, widely used in the financial industry, to automate analysis and regular monitor-
ing of internal and external sources.
36
IRM 5.12.2.3, Notice of Federal Tax Lien Filing Determination (Pre-filing Considerations) (Oct. 14, 2013).
37
IRM 5.12.2.3(3) (Oct. 14, 2013). The IRM does not instruct employees to consider if the taxpayer is attempting to engage
with the IRS through correspondence or phone.
38
See Taxpayer Bill of Rights, The Right to Privacy, available at http://www.taxpayeradvocate.irs.gov/taxpayer-rights/right-7.
39
IRC § 6320; IRM 5.12.2.3(2) (Oct. 14, 2013).
40
Form 433-F, Collection Information Statement (Rev. Jan. 2013), Catalog 62053J.
41
See supra note 5. The IRS has provided that “lien filing determinations are not tracked,” and thus it is not studying the num-
ber of lien determinations that are made, and of that number, how many resulted in a lien actually being filed and the length of
time between the determination and filing. SB/SE response to TAS information request (June 10, 2015).
42
IRS, Careers Home, available at http://www.jobs.irs.gov/student/accounting-budget-finance.html (last visited Dec. 4, 2015).
43
See generally Experian, Financial Stability Risk Score, available at http://www.experian.com/business-information/financial-
stability-risk-score.html (last visited Dec. 4, 2015); Rosella, Credit Risk Analysis and Modeling, available at http://www.
roselladb.com/credit-risk-analysis.htm (last visited Dec. 4, 2015); Rapid Insight® Analytics, Predictive Modeling Software, avail-
able at http://www.rapidinsightinc.com/products/analytics/ (last visited Dec. 4, 2015).
44
LexisNexis, RiskView, available at http://www.lexisnexis.com/risk/products/riskview-credit-risk-management.aspx (last vis-
ited Dec. 4, 2015); LexisNexis, Accurint® for Collections: Decisioning Workflow, available at http://www.lexisnexis.com/risk/
products/collections/accurint-collections-decisioning.aspx (last visited Dec. 4, 2015).
Taxpayer Advocate Service — 2015 Annual Report to Congress — Volume One 119
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Recommendations
Most Serious
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Most Litigated
Issues
Case AdvocacyAppendices
The IRS should develop a risk-scoring algorithm for meaningful NFTL filing determinations in an auto-
mated setting and regularly update these models to reflect actual and up-to-date data. Currently, the IRS
does not utilize any risk-scoring system or business rules in determining when to consider the filing of an
NFTL.
45
While there would be an initial investment in terms of programming costs, it would likely result
in more efficient lien filing and would save the IRS expenses associated with the filing of liens against
nonexistent assets.
46
Any such model, however, must be built based on the fundamental principal that the IRS is not a busi-
ness. That is, unlike private creditors, the IRS is not able to pick and choose with whom it wants to “do
business.” And unlike a business, the IRS cannot solely focus on the debtor’s current tax debt; it must
continue “doing business” with the taxpayer from year to year.
47
Future compliance is a predominant con-
cern for any IRS risk scoring. Finally, it is vital that any IRS risk-scoring models are constantly updated
with actual taxpayer behavior data.
At the very least, the IRS could replace the mandatory NFTL filing on currently not collectible (CNC)
taxpayers and on taxpayers with no assets with a system of automated subsequent filing determinations.
These automated subsequent filing determinations would be based on periodic monitoring of whether
the taxpayers have acquired assets or their financial situations have improved by developing software that
can incorporate analysis of information from Accurint® and IRS internal databases. This type of analysis
would enable the IRS to continue to protect the government’s interest in any future assets without un-
necessarily harming taxpayers. The IRS currently allows employees to refile a NFTL, following extension
of the collection statute expiration date, using their judgment rather than an arbitrary threshold amount.
48
It could also apply this approach to the original NFTL filing.
Updating IRS e-Guides to Incorporate Basic Financial Analysis on Taxpayers Prior to
NFTL
Another cost-effective way to operationalize the review of the taxpayer’s financial condition, outside of the
ACS lien filing, would be to update the IRS e-Guides with a series of questions determining if the tax-
payer has or is likely to have assets to which a lien can actually attach.
49
The e-Guides would instruct IRS
employees not to file a lien if they are unable to locate assets and to refrain from filing an NFTL within
the ten-day period if no concerted effort is made to contact and speak directly with taxpayer.
45
SB/SE response to TAS information request (Nov. 6, 2015) (stating that the IRS does not currently use any “risk-scoring sys-
tem or business rules in determining when to consider filing an NFTL”).
46
In FY 2015, TAS had a closure rate with relief of 65 percent (603 cases) for lien release and approximately 68 percent (629
cases) for lien withdrawal. See TAS Business Performance Management System Report, Closures – TAS Relief Rate by PCIC by
BOD (FYs 2010-2015). The IRS has not done a comprehensive study on the costs associated with filing liens, for either indi-
viduals or businesses, since 1998, and that study was limited. See North Central DORA, South Texas DORA, Federal Tax Lien
Project, Project 13.14, Profile Report (Dec. 1998).
47
Unlike a private creditor, the IRS cannot decide to never lend to a debtor again.
48
Upon the collection statute expiration date, the liability secured by lien becomes legally unenforceable. See generally IRC
§§ 6325(a)(1) and 6502(a). The NFTL contains the self-releasing language that extinguishes the NFTL and underlying statu-
tory lien. See Form 668(Y)(c), Notice of Federal Tax Lien (Rev. Feb. 2004). If the collection statute is extended or suspended
on the underlying assessment, beyond the ten-year period, the NFTL must be refiled in the original jurisdiction to keep its prior-
ity back to the original filing date. See IRC § 6323(g).
49
E-Guides, or “electronic procedure guides,” have been developed and used by the IRS for many years. They are formal guides
for IRS employees that organize the different types of important processes and procedures in an easily accessible and usable
way. See IRM 5.19.1.1(6) (Sept. 29, 2014).
Most Serious Problems — Notices of Federal Tax Lien (NFTL)120
Legislative
Recommendations
Most Serious
Problems
Most Litigated
Issues
Case Advocacy Appendices
Current Data Reveals That Early Interventions Drive the
Collection of Revenue
TAS Research & Analysis is currently studying how the aging of a delin-
quency affects dollars collected on Taxpayer Delinquent Accounts (TDAs).
50
A study, set forth in Volume 2 of this report, examines the Individual Master
File (IMF) Accounts Receivable Dollar Inventory (ARDI) to determine how
dollars collected fluctuate as time elapses.
51
The study determined that col-
lection decreases as time passes, with dollar collections of over twice as much
during the first year as in the second year, and over three times the collec-
tions in the third year.
52
Furthermore, the study found that even within the
first year, dollars collected decreased by about one-third after every three-
month period elapsed. Not only do raw dollars collected decrease, but the
percent of the amount collected declines as time progresses with only about
seven percent collected in the third year.
53
This study clearly demonstrates
the importance of early meaningful contact. The IRS should use the data
collected by TAS Research to revise its NFTL filing policies and increase its
efforts to make early and frequent taxpayer contacts.
The IRS’ Lien Pilot Program May Provide Significant Evidence of What IRS Actions Result
in Revenue Collection
In the summer of 2014, the IRS indicated its plan to revert back to the published NFTL filing threshold
of $10,000 for ACS NFTL filings.
54
After intervention by the National Taxpayer Advocate, the IRS
agreed to conduct a lien filing pilot before it makes any changes in ACS filing threshold, to determine
whether lowering the ACS NFTL filing threshold to $10,000 would result in enhanced protection of the
government’s interest and would facilitate the collection of delinquent tax liabilities. The IRS anticipates
starting the Collection Lien Pilot in February 2016. The lien pilot program could become an excellent
starting point in the development of a risk-scoring algorithm for meaningful NFTL filing determinations.
The National Taxpayer Advocate has suggested that the lien pilot program focus on the use of “meaning-
ful contact” with taxpayers prior to the filing of the NFTL, rather than just studying the impact of differ-
ent dollar thresholds, and examine the impact of NFTLs on future compliance. Specifically, the National
50
IRS Collectibility Curve, vol. 2, infra. In prior Annual Reports, the National Taxpayer Advocate has discussed how many TDAs
in the IRS Automated Collection Branch and the Collection Field function are often delinquencies that have existed for many
years. The age of IRS TDA inventory is highlighted in the following statistics: (1) 55 percent of the IRS IMF TDA inventory has
been in the function assigned the delinquency for at least ten months; however, the delinquency may have been in the TDA
status much longer; (2) nearly 70 percent of the IMF TDAs in IRS inventory at the end of FY 2015 are Tax Year 2011 and prior
liabilities; and (3) over 22 percent of the TDAs have less than four years remaining on the collection statute, meaning that the
delinquency has existed for over six years. IRS CAR, NO-5000-5 (Oct. 3, 2015).
51
Id.
52
Id. The analysis showed that dollars collected decreased by over 50 percent from the first year to the second year and collec-
tion decreased in the third year by over 30 percent from the amount collected in the second year.
53
Id. Although the balance of tax due continues to decrease slightly, the amount of assessed and accrued penalties and interest
continue to rise.
54
See email from John Dalrymple, Deputy Commissioner for Services and Enforcement, to Nina Olson, National Taxpayer
Advocate (Aug. 4, 2014). IRM 5.19.4.5.3.2, Filing Criteria (Jan. 1, 2015) provides that a NFTL filing threshold is $10,000, not
$25,000.
The IRS should redefine the use
of a Notice of Federal Tax Lien
(NFTL) as a powerful collection
tool based on meaningful and
early contact with taxpayers,
automation of financial analysis
and asset verification, and the
impact of NFTL filing on the
taxpayer’s financial viability and
future compliance.
Taxpayer Advocate Service — 2015 Annual Report to Congress — Volume One 121
Legislative
Recommendations
Most Serious
Problems
Most Litigated
Issues
Case AdvocacyAppendices
Taxpayer Advocate has recommended, and the IRS has accepted, the following four treatment groups for
the lien filing pilots, plus a control group:
Treatment Group 1 will provide for the IRS to file NFTLs on a group of taxpayers with cases in the
queue with unpaid liabilities between $10,000 and $25,000. TAS has requested that Collection
ensure these taxpayers have been advised by someone in ACS that the NFTL will be filed and the
pre-lien determination considerations in IRM 5.12.2.3 be used prior to the filing of a lien.
Treatment Group 2 will receive a reminder notice that the taxes are still owed and that the taxpay-
ers need to contact the IRS to resolve the delinquencies.
Treatment Group 3 will receive a new notice that also provides more information about payment
alternatives that may be available to the taxpayers.
Treatment Group 4 will receive monthly reminder notices throughout the pilot period.
The control group will follow the current process without any new treatment.
Using the treatment groups suggested by the National Taxpayer Advocate will result in measuring the
impact of various types and frequency of contact with taxpayers instead of an automatic lien filing and
would provide a basis for future NFTL filing criteria.
CONCLUSION
The IRS’s policy of filing NFTLs based on an arbitrary dollar threshold fails to take into account the
taxpayers’ ability to repay the liability and future compliance. The IRS needs to utilize data analysis and
the results of the lien pilot program to drive its decision on whether to continue using monetary thresh-
olds to trigger NFTLs. The IRS should redefine the use of an NFTL as a powerful collection tool based
on meaningful and early contact with taxpayers, automation of financial analysis and asset verification,
and the impact of NFTL filing on the taxpayer’s financial viability and future compliance. By developing
modern, comprehensive, and automated financial analysis and using early intervention tools, including
personal contact, the IRS will improve revenue collection and future compliance, and promote taxpayer
rights to a fair and just tax system and to privacy.
Most Serious Problems — Notices of Federal Tax Lien (NFTL)122
Legislative
Recommendations
Most Serious
Problems
Most Litigated
Issues
Case Advocacy Appendices
RECOMMENDATIONS
The National Taxpayer Advocate recommends that the IRS:
1. Revise the IRM to require employees to make multiple attempts to initiate a meaningful personal
contact with the taxpayer by phone or through mailing notices, instead of filing a NFTL after just
one attempt. The IRS should adopt an early intervention policy similar to the new standard in the
mortgage industry that requires two contacts, one of which is a person-to-person attempt, rather
than simply mailing a letter.
2. The IRS should increase the ten-day timeframe for filing an NFTL to enable taxpayers to reach out
to the IRS and provide financial information.
3. The IRS should continue to mail monthly notices to the taxpayers while the account is in the
queue, ACS, or the field.
4. In collaboration with TAS, develop criteria for conducting the lien pilot as agreed upon with the
National Taxpayer Advocate and refrain from decreasing the NFTL filing monetary threshold until
the results of the lien pilot can be examined and discussed.
5. Amend the IRM and related e-Guides and training materials to incorporate rules for NFTL fil-
ing determinations. The rules should specify that the following items are needed prior to filing:
“meaningful contact;” analysis of the taxpayer’s financial situation, including a hardship determina-
tion if needed; consideration of collection alternatives; application of the balancing test, which is
to balance the need for efficient collection of the tax with legitimate concerns of the taxpayer that
actions be no more intrusive than necessary; and the impact on future compliance.
6. Incorporate credit scoring and automated asset verification into financial analysis for making
NFTL filing determinations in ACS, with the provision to elevate close call and complex cases to a
manager.
7. For accounts moving from ACS to the queue, revise the IRM to require employees to conduct a
limited financial analysis based on a Form 433-F and refrain from filing an NFTL, if the employee
has determined there are no assets or reasonable expectation of the taxpayer to acquire assets in the
future.
8. Update the e-Guides with a series of questions determining if the taxpayer has or is likely to have
assets to which an NFTL can actually attach.
