Proving a Federal Tax Lien Has Expired

Not to belabor the background of FTLs but to quickly cover the basics for anyone not familiar with such liens, the FTL arises with the occurrence of three things: (1) assessment of the federal tax liability; (2) proper issuance of notice and demand pursuant to IRC 6303 (mailing the taxpayer a demand letter); and (3) neglect or refusal to pay the tax.  Take note that the existence of the FTL has nothing to do with recordation of the lien.

Because only the IRS and the taxpayer know about the FTL, Congress designed protections for competing creditors to allow the smooth flow of commerce.  The 1966 Federal Tax Lien Act established the system for the filing of the NFTL and the resolution of competition between the FTL and other creditors or persons with interest, such as purchasers, in property encumbered by a FTL.  IRC 6323 requires the IRS to record the FTL by way of a NFTL in order to perfect the FTL against certain parties.  The Gordon case concerns a filed NFTL and its self-releasing feature.

Although the court does not specifically talk about Mr. Gordon’s federal tax issues, I assume that he owed some amount of federal taxes which went unpaid after assessment.  The IRS then decides whether it wants to perfect its tax lien by filing an NFTL.  That decision embodies some policy concerns regarding the amount of the liability and the likelihood of the NFTL providing a benefit to the IRS in collecting the taxes.  I discuss these issues in a paper here.

In Mr. Gordon’s case, the IRS decided to file the NFTL and appears to have recorded it in the county where he lived.  That location follows the requirement in IRC 6323 that the IRS record the NFTL in the county where the taxpayer resides in order to perfect the FTL with respect to all of the taxpayer’s personal property.  It also usually results in perfecting the FTL with respect to the taxpayer’s home since the home is located where the taxpayer lives.  The NFTL perfects the FTL with respect to any real property the taxpayer owns in the county where the IRS records it.  If the taxpayer owns real property in jurisdictions outside the county of residence, the IRS must file a NFTL in each of those counties in order to perfect the FTL with respect to the real property in those other locations.

The statute of limitations on collection limits both FTL and the NFTL.  The statute of limitations on collection lasts for ten years unless something suspends it, e.g., an offer in compromise, a Collection Due Process request, living outside the US continuously for more than six months and several other actions.  Here, the IRS filed the NFTL on September 6, 2005.  Because it normally takes several months after the assessment before the IRS files the NFTL, the statute of limitations on assessment would run from the date of the earlier assessment and not from the date of the recording of the NFTL.  Although it filed the NFTL against Mr. Gordon, the IRS did not bring suit against him nor did anything else suspend the statute of limitations on assessment.  The ten years from assessment ran at some point before September 6, 2015.  The NFTL self-released.  Release is a term of art here defined in IRC 6325(a) and it means, inter alia, that the lien is unenforceable.

Probably because the self-releasing feature of the lien does not provide a sufficiently affirmative statement of the death of the NFTL, Mr. Gordon brought an action in 2019 in the state court in the county where the IRS filed the NFTL to strike the lien.  The IRS, as it almost always does when sued in state court, removed the case to the federal district court.  The IRS does not like to engage in litigation in state courts.  After removal, the IRS moved to dismiss the case for lack of subject matter jurisdiction and failure to state a claim.  After all, the NFTL itself provided for exactly the relief Mr. Gordon sought in suing the IRS.  The IRS, no doubt, felt that defending the suit wasted its time and defeated the purpose of the time saving self-releasing feature of the NFTL.

The court states that “Gordon’s petition seeks to strike the NFTL, but all parties agree that the NFTL is no longer active, and therefore there is no active controversy over which this Court has jurisdiction.”  Mr. Gordon, however, argues that because of a judgment entered by the state court on its docket an active controversy exists.  The court disagrees with Mr. Gordon and states “this case is moot because there are no longer live issues before this Court and it is unable to effectively render relief.  The USA has also granted Gordon the relief he seeks to the extent that it can.”

The only dispute remaining is not a dispute with the IRS but with the state court which filed a judgment in error.  So, the court remands the case to the state court but with the IRS out of the picture.  I hope that Mr. Gordon can get the state court to remove the judgment.  The issue of seeking a clearer statement of release arises occasionally and taxpayers seek from the IRS some affirmative statement that the lien no longer exists rather than trying to rely on the negative implication of the self-releasing lien.  The IRS has a procedure for taxpayers to use in order to obtain a statement of the release that they could show to prospective creditors in order to clear up any uncertainty.  The provisions exists in IRM 5.12.3. I do not know if these provisions would assist Mr. Gordon in resolving his problem with the lien, but there may be others who want something more than a self-released lien to prove that the NFTL no longer actively reflects a liability owed to the IRS.