Releasing a lien does not prevent an offset against the underlying tax liability

Plain-English summary

Chief Counsel's Office advice addressed whether the IRS could offset an overpayment against a tax liability for a year in which a lien had been released. It concluded that releasing a lien does not eliminate the underlying tax liability. The liability could therefore be collected by offset even if collection through other procedures would require a notice of deficiency. The memo also stated that an offset is not a levy action and could leave a pending Tax Court case without an unpaid liability supporting the proposed levy or lien.

Ruling snapshot

• Question: Can the IRS offset an overpayment against a tax liability after releasing a lien for that liability year?
• Outcome: Advice given.
• Key authorities: IRC §§ 6402 and 6325; Rev. Rul. 2007-51; Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006); 26 U.S.C. § 6110(k)(3)

Full text (IRS public release)

ID: CCA_2011102510075726 Number: 201145019
Release Date: 11/10/2011
Office: --------------
UILC: 6402.01-00, 6325.00-00

From: -----------------
Sent: Tuesday, October 25, 2011 10:07:57 AM
To: ------------------
Cc:
Subject: 6402 Offset after Filing of Release of Lien

Hi -------- I agree. A release of a lien does not, by itself, affect the existence of a tax liability. The tax liability legally exists independent of any procedural action on the part of the Service. An SNOD prepared by the Service may show a tax liability exists (Rev. Rul. 2007-51) which means the liability may be collected by offset without any assessment, notice and demand, or secret lien. A bal due return filed by a taxpayer shows a tax liability exists as well. So, the tax liability for the release year may be offset with another year’s overpayment even though to otherwise collect for the year of release the Service might have to issue an SNOD; e.g., if an assessment based on the amount shown on return was abated after a substantive, but now clearly mistaken, determination.

The offset isn't a levy action. If a CDP levy (or lien) action was pending in Tax Court for a liability year, a subsequent offset with another year’s overpayment would result in the dismissal of case - because there’s no unpaid tax liability upon which the proposed levy (or a lien) could be based - without the court questioning the offset. Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006).