The IRS Filing Less Liens Increases Risks For Lenders Published August 27, 2013

In a previous blog post we looked at the Notice of Federal Tax Lien as a historical artifact. But we might also say that it is an endangered species. According to a recent internal IRS data report, the IRS filed 32% fewer Federal Tax Liens in 2012, and the decrease was even more significant- a whopping 61% among liens filed by the Automated Collections System.

What’s happening here? Is the IRS in general and their collections division specifically, backing down on lien filings? It’s easy to start thinking that the big bad taxman has gone soft these days.

But they haven’t gone soft, they’ve gone covert. More and more the IRS is choosing to fly under the radar, and it’s a choice that kills two birds with one stone. On one hand, there’s the public relations advantage-the IRS is able to point to the fact that they’re filing significantly fewer tax liens as evidence of their new, “kinder, gentler” approach. In truth this is logic akin to catching more flies with honey, because the more approachable they seem, the more effectively delinquent taxpayers are enticed to come forward, hat in hand, and make arrangements for repayment.

After all, they’re offering everyone a “fresh start,” right? (You can read the IRS “Fresh Start” announcement here) All too often, all that happens is that taxpayers inadvertently cough up useful collections information in a process that does not end in account resolution (e.g. confirming a current client or employer, or where they currently bank). This is still a win for the IRS.

Appearing more approachable is also a move that serves the IRS well in levy situations–ask any tax practitioner, and they can tell you about a handful of times they’ve seen the third party recipient of a receivable levy contact the IRS for direction, resulting in funds erroneously paid to the IRS.

If you’re thinking all this sounds a little too methodical and psychological to be the work of a taxing authority, it’s not- the IRS has charged an investigative team within the Taxpayer Advocate Service to study the affect of lien filings on taxpayer behavior, and the early conclusion is that lien filings dissuade taxpayer cooperation and therefore inhibit collection. In short, the IRS benefits from appearing as approachable and reasonable as possible, and filing fewer liens has been a brilliant play in crafting the idea that the teeth have been taken out of the collections process.

The move toward fewer liens also lightens the administrative load when it comes to putting taxpayers, representatives, and authorized third parties on notice of balances, the collection process, and the risk of levy action. The burden of proof is deflected, and now rests with the taxpayer or lender who must do his own investigative work to determine the status of accounts and the risks of levy.

This is a particularly difficult task when you consider that the necessary data must still come directly from the IRS, and their personnel are generally unable or unwilling to quantify the risk of levy for interested parties. And can this trend toward fewer liens be read as an indication of decreased levy action? Not quite. Remember, the IRS does not have to file a lien in order to take levy action, and in fact, “liens filed” and “levies issued” are inversely proportional to an alarming degree: there are 50% more levies issued today than there were four years ago.

Unfortunately for lenders, this new increased risk has been transferred to the private sector. In light of these changes, lenders who aren’t proactive are doomed to be reactive, and anyone screening for, or waiting for, a Notice of Federal Tax Lien to pop up on a public record search, risks not being aware of the true risk that is at play with their borrowers’ tax liabilities.

As the practice of filing liens falls by the wayside, and levy action is ratcheted up markedly, lenders must evaluate tax risk knowing that the new “kinder, gentler” IRS is anything but.