A general creditor needs to go to court and get a judgment before he can take collection action against a debtor. In addition, a general creditor is unsecured until he obtains a judgment lien in his favor. The IRS has broad collection powers. In order for the IRS to collect a tax debt, the debt must first be assessed. The assessment of a tax liability creates a collectible liability with the force of a court judgment obtained by a general creditor that allows the IRS to take necessary collection action. Collection action includes: levying bank accounts, garnishing wages, and seizing (levying) real and personal property. In order for a taxpayer to obtain judicial review of a tax that has been assessed, he must generally pay the tax and file a petition in district court or the court of federal claims.
Even when the IRS sends a notice of deficiency, a taxpayer is the party who is tasked with bringing the issue in front of a court. In order for a general creditor to take collection action, it must: bring an action in court, carry the burden of proof that the debt is owed, prove that the creditor is entitled to payment, obtain a judgment, and collect on the judgment against the judgment debtor. Despite the differences in presumptions and burdens that apply to a debt to a general creditor and an assessed tax liability, the collection process that the IRS follows is, in many ways, functionally similar to the way a general creditor would go about collecting a debt. However, the differences are important because they illustrate the special powers and rights afforded to the IRS that are not available to the general creditor.
Once a tax has been properly assessed, the IRS will send the taxpayer several “dunning letters” requesting that he pay his tax liability and listing the amount of interest and penalties that have accrued on his tax liability. General creditors also send dunning letters to debtors and attempt to contact them over the phone to collect a debt before bringing action in court. However, when the IRS begins sending dunning letters, the tax has already been assessed. At this point, the IRS already has the right to collect on that debt without going to court. General creditors, on the other hand, attempt to collect a debt by issuing dunning letters before they have a secured interest in the debtor’s property.
In terms of priority, a general creditor does not have a perfected security interest in the property of the debtor until it obtains a court order that creates a judicial lien. A tax lien is retroactive to the date of assessment, and it arises when a taxpayer fails to pay the entire tax in response to a notice and demand for payment. A tax lien does not need to be filed in order to retain its priority against most creditors. Because of this, it is sometimes called a “secret lien.” The IRS does not need court approval to file a Notice of Federal Tax Lien. Such a filing will insure the IRS’s priority over all subsequent creditors of the taxpayer. On the other hand, a general (unsecured) creditor does not have a definite priority over other creditors until it initiates court proceedings.
Prior to trial, a court may allow a general creditor to attach the property of a debtor prior to final judgment to ensure that any judgment in the creditors favor will be paid. Prejudgment seizure and wage garnishments available to a general creditor create a specific lien in its favor. After final judgment, the lien is perfected and relates back to the date of the levy or garnishment. However, even for provisional attachment before a final judgment, there still must generally be a pre-seizure hearing (sometimes a post-seizure hearing is enough). The IRS, on the other hand, has a lien in its favor on all of the taxpayer’s property and rights to property by operation of law once a taxpayer is sent a notice and demand and fails to pay the tax liability. A taxpayer can request a Collection Due Process hearing in response to a Notice of Federal Tax Lien Filing and a Notice of Intent to Levy. Filing for a Collection Due Process hearing prevents the IRS from taking collection action on the Taxpayer’s property until the CDP proceeding is over. However, a request for a CDP hearing will not stop the IRS from filing a notice of federal tax lien. As soon as this notice is filed, the IRS is perfected against (and has priority over) unperfected creditors of the taxpayer. On the other hand, a general creditor will not be perfected in his specific lien on the property of a debtor seized prior to a final judgment.
The IRS can sell property it has seized from a delinquent taxpayer provided that the taxpayer is provided with notice; it is not required to obtain a court’s permission to do so. On the other hand, even after a general creditor has obtained a final judgment, the judgment must first be docketed and a writ of execution must be issued by the court clerk. When selling a debtor’s property subject to its judicial lien at a sheriff’s sale, a creditor is usually required to have the property appraised. The IRS is only required to determine a minimum price, but this price is not necessarily the value of the property. After the property is sold, both the debtor and the taxpayer will have a certain period of time (prescribed by law) to redeem/repurchase the property.