In a Chief Counsel’s Advice (“CCA”) 201231001 released recently, the IRS accepted a collateral agreement and bond from a C corporation in lieu of filing a Notice of Federal Tax Lien (“NFTL”), where the C corporation argued that filing a NFTL would ruin its business. A collateral agreement is a pledge, guaranteed by security, for the performance of a certain act, for example the payment of a delinquency or the filing of a return. Treas. Reg. 301.7101-1(a) requires the execution of a bond on an appropriate form prescribed by the Service and with a satisfactory surety. Treas. Reg. 301.7101-1(b)(1) provides that a surety holding a certificate of authority from the Secretary as an acceptable surety on Federal bonds is a satisfactory surety.
Generally, the IRS will file a NFTL in the following situations:
In CCA 201231001, the taxpayer was a privately-owned C corporation that sold insurance and provided completion and other bonds to contractors. The taxpayer’s sole shareholder demonstrated an inability to currently pay the entire deficiency assessed on audit, and said filing of a notice of a NFTL would “ruin its business and thus prevent payment of the remaining taxes owed.” The taxpayer submitted sample payment bond language and a proposed amortization schedule for its proposed collateral payment agreement. The collateral agreement proposed payment of the shortfall over three years at a 3% interest rate, compounded monthly, with a payment schedule of 12 monthly payments. The taxpayer made a payment when it submitted the proposal.
Section 6621(a)(2) provides that the underpayment interest rate is computed by adding 3% to the Federal short-term rate. Section 6621(c)(1) provides that the underpayment rate for large corporate underpayments is the Federal short-term rate plus 5%. Section 6621(c)(3)(A) defines a large corporate underpayment as any underpayment of tax by a C Corporation for any taxable period if the amount of the underpayment exceeds $100,000. The Federal short-term rate for the first and second quarters of 2012 is 0%, and the large corporate underpayment rate for the first and second quarters of 2012 is 5%. Rev. Ruls. 2011-32, 2012-8. The taxpayer’s liability for the period at issue exceeded $100,000.
The CCA advised that the collateral agreement and bond could be accepted from the taxpayer in lieu of an NFTL, but the agreement’s terms must include interest accruing at the large corporate underpayment rate of 5%, compounded daily. This is not a fixed rate, but one that varies monthly, depending on the Federal short-term rate. The Chief Counsel’s Office noted that a collateral agreement secured by a bond with appropriate surety, authorized by 26 U.S.C. § 7101, does not compromise the tax liability, and should not be confused with collateral agreements in the context of offers in compromise. That is, this taxpayer was paying the full amount owed, and not attempting to pay a lesser amount.
The CCA also stated that the collateral agreement pledging payment of the tax deficiency should include terms required by Internal Revenue Manual § 5.6.1, including:
• that the IRS intends to offset any refunds to the delinquent account until it is paid in full or otherwise satisfied,
While Chief Counsel Advice may not be cited or used as precedent (26 U.S.C. § 6110(k)(3)), this advice may signal the beginning of an alternative means to avoid the filing of a NFTL in certain situations.
Generally, the IRS will file a NFTL in the following situations:
- Any account with an aggregate unpaid balance of $10,000 or more.
- All installment agreement cases not meeting the streamlined, guaranteed, or in-business trust fund criteria.
- A case involving both assessed and un-assessed periods that have not yet been classified as “currently not collectible.”
- A case that has an open account with an aggregate unpaid balance of $10,000 or more that has been classified as “currently not collectible.”
- Property that is exempt property for purposes of Federal bankruptcy or state insolvency proceedings.
- The taxpayer lives outside the U.S. and has known assets.
- A pending bankruptcy or other exigent circumstance exists and the government’s interest will be protected (even if the aggregate unpaid balance is less than $10,000).
In CCA 201231001, the taxpayer was a privately-owned C corporation that sold insurance and provided completion and other bonds to contractors. The taxpayer’s sole shareholder demonstrated an inability to currently pay the entire deficiency assessed on audit, and said filing of a notice of a NFTL would “ruin its business and thus prevent payment of the remaining taxes owed.” The taxpayer submitted sample payment bond language and a proposed amortization schedule for its proposed collateral payment agreement. The collateral agreement proposed payment of the shortfall over three years at a 3% interest rate, compounded monthly, with a payment schedule of 12 monthly payments. The taxpayer made a payment when it submitted the proposal.
Section 6621(a)(2) provides that the underpayment interest rate is computed by adding 3% to the Federal short-term rate. Section 6621(c)(1) provides that the underpayment rate for large corporate underpayments is the Federal short-term rate plus 5%. Section 6621(c)(3)(A) defines a large corporate underpayment as any underpayment of tax by a C Corporation for any taxable period if the amount of the underpayment exceeds $100,000. The Federal short-term rate for the first and second quarters of 2012 is 0%, and the large corporate underpayment rate for the first and second quarters of 2012 is 5%. Rev. Ruls. 2011-32, 2012-8. The taxpayer’s liability for the period at issue exceeded $100,000.
The CCA advised that the collateral agreement and bond could be accepted from the taxpayer in lieu of an NFTL, but the agreement’s terms must include interest accruing at the large corporate underpayment rate of 5%, compounded daily. This is not a fixed rate, but one that varies monthly, depending on the Federal short-term rate. The Chief Counsel’s Office noted that a collateral agreement secured by a bond with appropriate surety, authorized by 26 U.S.C. § 7101, does not compromise the tax liability, and should not be confused with collateral agreements in the context of offers in compromise. That is, this taxpayer was paying the full amount owed, and not attempting to pay a lesser amount.
The CCA also stated that the collateral agreement pledging payment of the tax deficiency should include terms required by Internal Revenue Manual § 5.6.1, including:
• that the IRS intends to offset any refunds to the delinquent account until it is paid in full or otherwise satisfied,
• that the taxpayer must remain current on filing and not incur further delinquencies during the term of the agreement, and
• that the IRS has a unilateral right to liquidate the collateral upon the taxpayer’s failure to keep the terms of the agreement.
While Chief Counsel Advice may not be cited or used as precedent (26 U.S.C. § 6110(k)(3)), this advice may signal the beginning of an alternative means to avoid the filing of a NFTL in certain situations.
If you have Tax Liabilities and you Don't Want a Tax Lien, contact the Tax Lawyers at Marini & Associates, P.A.
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