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Collection Action -- The Proper Balance

In speaking to most IRS collection officers, you would be under the impression that the IRS can file a lien against a taxpayer’s property whenever the taxpayer owes money to the government. However, a recent Tax Court decision, James B Budish v. Commissioner, showed that may not always be the case.

Mr. Budish owed the Service over $200,000. He attempted to enter into an installment agreement. However, as a condition of the agreement, the IRS insisted on filing a lien based on their interpretation of the Internal Revenue Manual (IRM) Section 5.12.2.4.1. This section states that the IRS “In general, should” file a notice of lien when there is a balance of $5,000 or more.

The Tax Court held that the wording, “In general”, meant there could be instances when the government should not be filing a lien. In fact, the taxpayer argued just that point. Under IRC 6330(c)(3)(C), the government must legitimately balance and weigh the interests of efficient government collections against the taxpayer’s legitimate concern that the collection action be no more intrusive than necessary. Mr. Budish argued that the notice of lien would do irreparable harm to his vendor and customer relationships, rendering him unable to do his work and deny him with his only source of income.

The Court held for the taxpayer, stating that:

  1. The IRS incorrectly concluded that a lien filing was required.
  2. There was no consideration in balancing the government’s needs for collection against the taxpayer’s concern that the collection action be overly intrusive.

The case was then remanded back to the Appeals Office of the IRS with instructions to hold a supplemental Collection Due Process hearing with the taxpayer. However, for this hearing they would be required to balance the factors noted in IRC 6330(c)(3)(C).   

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