The Filing of Federal Tax Liens and Abuse of Discretion.

Filing of a Federal Tax Lien as a condition for an installment agreement was an abuse of discretion.

A sculptor (working in cast bronze) filed his individual federal income tax return and reported a balance of tax due of $163,928.00. He did not pay the balance. The IRS assessed the tax, penalties and interest. A notice of intent to levy was issued and the taxpayer requested and received a collection due process hearing.

During the hearing, the taxpayer agreed with the terms of an installment agreement which would full pay the liability with monthly installment payments of $5,500.00. However, the IRS Appeals Officer insisted on the filing of a notice of federal tax lien as a condition of entering into such installment agreement. Taxpayer had negligible assets. The only source for payment of the balance owing was taxpayer’s income from his business.

Tax Lien Filing would destroy the business.

The taxpayer’s legal counsel advised the IRS Appeals Officer that the filing of a tax federal lien would destroy the taxpayer’s business rendering him unable to satisfy the terms of the installment agreement. Specifically, the taxpayer had a longstanding business relationship with a foundry (supplier) which provided the taxpayer with 30% to 50% discounts from market prices.

The federal tax lien filing would adversely impact production, sales and payment for materials.

The filing of the tax lien would adversely impact all sides of the cash flow equation. It would drastically alter the discounts previously provided. The taxpayer would be required to immediately pay for all work previously produced, and additionally have to make “up front” payments for all future work. At the other end of the spectrum, the notice of tax lien would cause buyers to cease financing petitioner by paying up front commissions out of concern that they might never receive the artwork because of the taxpayer’s financial difficulties, or because the artwork may be encumbered by the tax lien. Further, the filing of a tax lien would even adversely affect the taxpayer’s ability to pay the foundry (supplier) using his American Express credit card (to pay for materials and casting costs) because of the detrimental effect on his credit rating.

IRS Appeals Ignores Economic Realities.

The IRS Appeals Officer essentially ignored all of the above factors. Instead, Appeals issued a notice of determination sustaining the notice of levy and that a federal tax lien would be filed to “protect the government’s interest”.

I have found that the phrases “best interest of the government”, and “protect the governments interest” are phrases routinely used by the IRS in collection cases. However, they are in fact used with little or no actual mental thought process or concern as to the real world consequences.

In this case, the taxpayer filed a timely Tax Court proceeding alleging that the Appeals Officer abused her discretion by requiring that a notice of lien be filed in conjunction with the installment agreement.

The Tax Court held that the Appeals officer was in error by concluding that the Internal Revenue Manual required the filing of a notice of federal tax lien under the circumstances of this case. The Tax Court found that under the facts of this case, the Appeals determination was an “abuse of discretion” (i.e., The Appeals Officer’s determination was arbitrary, capricious, or without sound basis in fact or law).

The Tax Court found that the Appeals officer gave little, if any, consideration to petitioner’s arguments and, instead, decided a notice of lien should be filed because of her mistaken belief that she lacked discretion to do otherwise under the IRM. The Court found that the Appeals officer did not balance the need for the efficient collection of taxes with petitioner’s legitimate concern that the collection action (i.e., the notice of lien) be no more intrusive than necessary, as required by section Internal Revenue Code Section 6330(c)(3)(C). By failing to perform that function, she abused her discretion in sustaining the levy against the taxpayer’s assets.

In this case, the Tax Court rejected the determination of Appeals, and remanded the case to Appeals for a supplemental collection due process hearing with directions that proper balancing of factors be done (i.e., efficient collection of the liability vs. taxpayer’s concern that collection action be no more intrusive than necessary).

T.C. Memo. 2014-239
JAMES B. BUDISH, Petitioner v.
Docket No. 4243-12L. Filed November 24, 2014.