Before enforcing any levy, the Internal Revenue Service (IRS) must notify a taxpayer of their delinquent debt. But what constitutes effective notice? The IRS doesn't need to be perfect. Instead, courts have held that “substantial compliance” is enough. So let's examine what “substantial compliance” means and how it can impact you in an IRS lien case.
What Is at Issue—What's at Stake
Before levying any property, the IRS usually files a “Notice of Federal Tax Lien,” a public document that notifies creditors of the IRS's lien on the property. The filing of this notice is significant because its filing date is used to give the IRS priority over other creditors.
But what if there are errors in the notice that misidentify the taxpayer? Do these errors negate the effectiveness of the notice? That's been the argument of some taxpayers who have challenged the liens in court.
In the leading cases, the errors have been small. For example, plaintiffs have challenged when the IRS included the wrong letter for a taxpayer's middle initial, had one letter misspelled in a last name, or substituted the use of an ampersand (&) when a company used “and” written out.
While these differences may seem trivial, most title searchers and related property reviews are done using form-driven computer searches. A misspelling or an ampersand could result in a false negative—a response that there were no liens relating to a taxpayer when a lien was in place.
Therefore, goes the plaintiffs' arguments, the IRS never filed an effective notice of a lien, so it couldn't have legally executed the levy.
The “Substantial Compliance” Test
The leading case on this issue is U.S. v Sirico. In that case, the Sirico Court held that a notice, even with typos, meets the requirement. The court explained:
The essential purpose of the filing of the lien is to give constructive notice of its existence. The test is not absolute perfection in compliance with the statutory requirement for filing the tax lien, but whether there is substantial compliance sufficient to give constructive notice and to alert one of the government's claim.
In other words, the notice just needs to be close enough that it should have led to creditors' getting the notice. The fact that, due to the error, creditors may not actually receive that notice is irrelevant. (Practically speaking, this puts the burden on creditors to look for liens; they should be using name variations to find errant records.)
The lesson here is that tax law is technical—but the IRS can still hold taxpayers liable when technical requirements aren't always satisfied. If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.