If a taxpayer wants to sell property subject to an IRS lien and the IRS agrees to allow the sale, can the taxpayer designate what tax period the proceeds paid to the IRS from the sale are to be applied? The IRS attorneys address this in CCA 201916009.

Facts in CCA 201916009

In CCA 201916009, the IRS Office of Chief Counsel is responding to an IRS employee’s question about how to apply payments for a lien discharge. Specifically, the IRS employee is asking whether the taxpayer can designate where the proceeds of the sale of property are to be applied when an IRS lien discharge is involved.

Apparently the taxpayer owned real estate that was subject to an IRS lien. The taxpayer wanted to sell the property, but needed the IRS to agree to discharge the property from the lien to allow the sale to go through.

The taxpayer wanted the proceeds to be applied to a specific tax year. Presumably the taxpayer wanted the payment applied to a more recent year, as the collection period for the prior year was about to expire (or the case involved payroll taxes and the taxpayer wanted to designate the payment to the taxes that would trigger trust fund recovery penalties).

The IRS wasn’t sure whether it had to honor the taxpayer’s request to designate the payment.

Designating Voluntary Payments

Taxpayers are generally allowed to designate how voluntary payments to the IRS are applied. They can pick which year payments are to be applied. They do this by noting the year on the payment instrument, such as the check sent to the IRS. This is described in Rev. Proc. 2002-26. The courts have upheld this policy.

The IRS Lien Discharge

The IRS is authorized to discharge its lien in certain circumstances. This is set out in Sec. 6325. This law allows the IRS to discharge its lien if, for example, the proceeds of the sale are to be paid to the IRS. The law makes lien discharges discretionary, not mandatory, for the IRS.

The taxpayer has to work with the IRS to get a lien discharge. The IRS has a lien unit that handles these requests.

Are Proceeds from a Lien Discharge Voluntary Payments?

The IRS CCA has this to say as to whether proceeds from a lien discharge are volunary payments:

Generally, taxpayers can designate voluntary payments. But I’ve always
understood that to be a general rule. IRM 5.1.2.8 states that “normally”
voluntary payment designations will be honored by the Service. But all
discharges (with the exception of 6325(b)(4) discharges) are at the discretion of the Service. So while taxpayers may generally designate voluntary payments as they wish, they cannot if that want a discharge that the Service is not required to give.

The CCA does not cite the applicable revenue procedure or supporting case law. It does not address whether proceeds paid to the IRS from the sale are a voluntary payment.

But it does not have to do so. The IRS attorney is correct in noting that the lien discharge is discretionary for the IRS. But can the IRS withhold a lien discharge on this basis? The IRS attorney believes the IRS can.

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