A Self-Defeating IRS Hard Line

photo by Hubert Yu

If you practice as a tax professional for more than a short time (and I have done it for much more than a short time), you will see the Internal Revenue Service take some strange and inexplicable positions.

Consider, for example, the hard line the IRS is taking with at least 22 counties in California over fees the Service must pay to record notices of tax liens it places against the property of taxpayers it considers delinquent.

The IRS is willing to pay $10 to record such a lien in Marin County, the affluent suburb across the Golden Gate Bridge from San Francisco. Since Oct. 1, it has refused to pay more than that $10. Yet the county, where the median home price is nearly $1.3 million, charges $14. County officials are refusing to process the IRS paperwork until the feds pay the same amount that every mortgage lender and remodeling contractor pays to put the world on notice of their claims.

Napa County Clerk and Recorder John Tuteur was blunt in his assessment of the IRS decision. “They’ve lost their minds,” Tuteur told The Press Democrat, a local paper in Santa Rosa.

Suppose a Marin couple who owes money to the IRS decides to sell their home and move to Mexico. With a properly recorded lien, the sale would almost certainly not go through, or at least only if the sale’s closing agent sets aside enough of the proceeds to satisfy the Service’s claim. The entire point of the federal lien is to alert creditors and transferees that the government has a legal right to the asset in question.

But an unfiled lien does not protect the government if the property is transferred to an unrelated party in a bona fide sale. That’s in the Internal Revenue Code itself – Section 6323(a) and (f), to be exact – with which the IRS is presumably familiar. So for the sake of $4, the IRS will sacrifice the collateral it could have taken to secure debts hundreds of thousands of times larger.

Another by-product of the IRS hard line happens when the process is reversed. Suppose a taxpayer wants to sell a parcel that is subject to a lien, and is prepared to settle up with Uncle Sam so the transaction can proceed. That taxpayer needs the government to issue – and record – another piece of paperwork known as a release of lien, which is exactly what it sounds like.

But guess what? In many jurisdictions, the same fees apply to release a lien as to file it. And the IRS is, again, refusing to pay more than it thinks it should. Ask yourself (since nobody at the IRS apparently asked themselves) why the taxpayer in this situation would be in a hurry to pay the tax owed if the IRS is not going to promptly release its lien, which secures a debt that would no longer be due? The IRS is supposed to be in the business of collecting money owed to Uncle Sam, rather than giving willing citizens a reason to sit on their wallets. Tuteur observed that residents can pay the fee for a lien release themselves, but why should they have to?

Sometimes in life, principle has to come before self-interest. That is how the IRS seems to see the situation in California. But this is a matter of semantics – not principle.

The state sets the fee for recording real estate liens at $10, but California allows counties to add a couple of extra charges. The counties can add fees for services such as seven-day availability or electronic indexing of documents. They can also add a charge up to $10 that goes to a fund for prosecutions of real estate fraud. After years of paying these fees where they were assessed, without argument, the IRS took another look and decided that these charges amount to an impermissible levy by the state and its subdivisions against the federal government. (Some counties, including Marin, report that the IRS stopped paying the fraud fee even earlier, ignoring repeated requests to pay up.) In a notice issued in late September, the Service said it would pay only the “actual costs” for recording lien-related documents.

If the state simply eliminated the separate charges and raised everybody’s filing fees to $25 or thereabouts, the IRS would presumably have no objection – even if the funds ended up being used for exactly the same purposes.

According to the San Francisco Chronicle, the issue has not arisen anywhere else in the country. I have not run across it myself, and it seems so pointless that I would not have expected to do so. Then again, I have enough experience with the IRS to assume anything is possible.

I expect this situation will get sorted out in due course, but possibly not until more California counties decide to take a similar hard line against a deadbeat IRS. Eventually there will be a news story about how the government lost millions it should have collected, all to save about as much money in filing fees as it would cost to pay half of the toll to cross the Golden Gate Bridge.

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