There is a vote for the next Springfield mayor coming up. This column is not about that race.
It is simply to answer the question of how a federal tax lien is issued for overpayment of taxes.
So, yes, the column does involve one of the mayoral candidates. About a month before this April 4 vote, City Councilwoman Kristi Fulnecky and her husband were issued an income tax lien by the IRS in the amount of $92,731. That’s a sizable chunk of change, and as a self-employed businesswoman who holds public office and is a mayoral candidate, the local media including Springfield Business Journal reported on it. You’re probably well aware of all this.
So here’s the thing: When Fulnecky answered questions about it, she called it an IRS mistake because she had actually overpaid on her taxes for several years.
Fact or fiction? That’s what this column is about. Those two notions don’t sit well together.
Here’s the driving question: Is there any circumstance for which one can be issued a tax lien notice for overpayment of taxes?
IRS media relations sources I asked said the simple answer is no.
IRS spokesman Michael Devine pointed to the agency’s definition in Publication 1468: “The federal tax lien arises when the tax liability has been assessed, a demand is made for its payment and the taxpayer does not pay it.”
It goes on to note up to 15 possible tax liabilities, none of which is overpayment.
The definition also says, “Filing the notice of federal tax lien is necessary to establish priority rights against certain other creditors. … This notice is used by courts to establish priority in many situations, including bankruptcy proceedings or sales of real estate.”
So, we can see the liens are a public protection of a private asset should a party ultimately file for bankruptcy or sell property. Got it.
In Fulnecky’s case, the IRS withdrew the lien notice within the same month of issuing it and her applying for withdrawal. The Greene County recorder’s office posted the withdrawal notice on March 28, eight days after Fulnecky announced on Facebook she received the IRS letter.
Here’s where my research hit a twist: An opinion of a local tax adviser is that both an overpayment and a tax lien notice can be absolutely true. However, more often tax liens are issued on amounts not actually due.
This is where the answer becomes not so simple. Here are possible scenarios, provided by Rod Link of Professional Accounting & Tax Services Inc. in Nixa:
1. A taxpayer is in an installment agreement for taxes owed and begins to make payments. At some point, the taxpayer realizes he has not taken a deduction or inadvertently over-reported income and decides to file an amended tax return to account for the taxes already paid. The amended return shows the taxpayer has paid too much, and thrilled by the news, he stops payments on the installment agreement. Here, we may run into some bureaucracy. The IRS department that processes amended returns takes 12 weeks, and in the meantime the IRS Collections Department has no idea an amended return has been filed. Collection officials assume the taxpayer has just stopped paying their obligation and issues a tax lien.
2. Let’s say a taxpayer sells a piece of real estate and does not report the transaction for good reason: because after improvement costs the taxpayer actually lost money on the property and will not owe any taxes on the sale. Here’s the snag: The IRS Underreporter Department notices the property sale was not reported on the individual’s tax return. Remember, the IRS would have received a 1099-S with the gross sales price from the real estate closing company. Now, the Underreporter Department notifies the taxpayer of the missing item. If the taxpayer does not provide additional information, the IRS calculates the tax based on what is reported (the full sales price without any costs) and issues a balance due notice. If the balance due notice goes unanswered, the IRS issues a lien.
Clear as mud?
So, let’s go back to the IRS withdrawal sent to the Fulneckys and now posted in the county recorder’s office. In contrast to a lien release, which signifies the amount owed was satisfied, a withdrawal removes the public notice and assures the IRS can’t compete with other creditors for the taxpayer’s property, according to the IRS tutorial, “How to Get Rid of a Lien.”
“However, you are still liable for the amount due,” the tutorial says.
My aim here is to help you process these statements. I’ll leave the final word to the taxpayer source:
“A lien withdrawal is a release without money being owed and a lien release means the taxes were paid and the lien released. I received a lien withdrawal,” Kristi Fulnecky says. “The IRS makes mistakes, and there have actually been three lien withdrawals filed by the IRS in Greene County in the last two years.”
Springfield Business Journal Editor Eric Olson can be reached at eolson@sbj.net.
