Statement of Senator Carl Levin (D-MI) on Introducing S.1124, the Levin-Coleman Tax Lien Simplification Act

Download a copy of the Levin-Coleman Tax Lien Simplification Act here. [PDF]

Mr. President, today is the day that millions of Americans across this country perform an important civic duty by paying their taxes. It is also a day when many Members of Congress take the time to reflect on the state of the federal tax system and consider how we can strengthen it, simplify it, make it more fair, and, in a responsible way, ease the tax burden on our citizens.

Earlier this year, I introduced the Stop Tax Haven Abuse Act, S. 681, to strengthen our tax system. That bipartisan bill, which I introduced with my colleagues, Senator Norm Coleman and Barack Obama, targets outrageous, offshore tax abuses that drain $100 billion each year from the U.S. Treasury at the expense of honest, hardworking American families who pay their fair share. Offshore tax abuses eat away at the foundations of our tax system, draining billions in tax revenue, diverting substantial IRS enforcement resources, and demoralizing honest taxpayers who play by the rules. S. 681 offers a host of provisions to stop offshore abuses, and I urge my colleagues to take a serious look at that legislation on this tax day. If enacted, it would make our tax system more effective, more fair, and more productive. It deserves to be enacted into law this year.

Stopping offshore tax abuse, however, is far from the only tax problem that needs to be addressed if we are to achieve a fair and cost effective tax system. So today, I am introducing with Senator Coleman legislation offering a cure to a completely different tax problem. The target of this legislation is better administration of federal tax liens.

It has been 40 years since Congress made any significant changes to the laws regulating how the Internal Revenue Service (IRS) files federal tax liens and makes them public. Right now, outdated laws are forcing the IRS to waste taxpayer dollars on an old-fashioned, inefficient, and burdensome paper tax lien filing system that should be replaced by a modernized electronic filing system capable of operating at a fraction of the cost. It is time to bring the federal tax lien system into the 21st century. That’s why I am introducing today, along with Senator Coleman, the Tax Lien Simplification Act, which will simplify the process of recording tax liens at an estimated ten-year cost savings of over half a billion dollars, while at the same time improving taxpayer service by speeding up the release of liens after taxes are paid.

Tax liens are a principal way to collect payment from persons who are delinquent in paying their taxes. By law, federal tax liens arise automatically ten days after a taxpayer’s failure to pay an assessed tax. The lien automatically attaches to the taxpayer’s real and personal property and remains in effect until the tax is paid. However, the tax lien is not effective against other creditors owed money by the same taxpayer, until a notice of the federal tax lien is publicly recorded. Generally, between competing creditors, the first to file notice has priority, so the filing of tax lien notices is very important to the Government and to the taxpaying public if taxes are to be collected from persons who don’t pay them.

Current law requires the IRS to file public notices of federal tax liens in State, county, or city recording offices around the country. There are currently more than 4,100 of these local recording offices, many of which have developed specific rules regulating how such liens must be formatted and filed in their jurisdictions. This patchwork system developed more by default than by plan, because those local offices were where documents affecting title to real property, judgments, and other lien and security interest documents had always been filed.

In 1966, to help the IRS comply with a proliferating set of local filing rules for federal tax liens, Congress passed the Tax Lien Act to standardize certain practices. This Act provided, for example, that liens against real estate had to be filed where the property was located, and required each state to designate a single place to file federal tax liens applicable to personal property. Most states subsequently adopted a version of the Uniform Tax Lien Filing Act, enabling the IRS to file a notice of tax lien in each locality where the taxpayer’s real estate is located, and a single notice where the taxpayer resides to reach any personal property. For corporations, states typically require the IRS to file a notice to attach real estate in each locality where the real estate is located, and a separate notice, usually at the state level, to attach other types of property. There are often additional rules for trusts and partnerships. The end result of the law was to reduce some but not all of the multiple sets of rules regulating the local filing of federal tax liens.

In addition, in most cases, the IRS continued to have to physically file the tax lien in the appropriate local recording office. In most cases, that filing is accomplished by mail. Some jurisdictions also allow electronic filings, but those jurisdictions are few and far between. The same is true if a lien has to be corrected, or a related certificate of discharge, subordination, or nonattachment needs to be filed, or when a tax liability has been resolved and the IRS wants to release a lien. Each usually requires a paper filing in one or more local recording offices. If a paper filing is lost or misplaced, the IRS often has to send an employee in person to deal with the problem, adding travel costs to other administrative expenses.

The paper filing system imposes similar burdens on other persons dealing with the tax lien system. Any person who is the subject of a tax lien, for example, or who is a creditor trying to locate a tax lien, is required to make a physical trip to one or more local recording offices to search the documents and see if a lien has been filed. Currently, there is no central database of locally filed tax liens that can be accessed by any member of the public or by any taxpayer that is the subject of a federal tax lien. Not even IRS personnel have access to such a tax lien database. It does not exist.

The result is an inefficient, costly, and burdensome paper filing system that can and should be completely revamped. Businesses across the country learned long ago that electronic filing systems outperform paper; they save personnel costs, material costs, time, and client frustration. Government agencies have learned the same thing as they have moved to electronic databases and recordkeeping, including systems made available to the pubic on the Internet. Among the many examples of government-sponsored, Internet-based systems currently in operation are the contractor registry operated by the General Services Administration to allow persons to register to bid on federal contracts, the license registry operated by the Federal Communications Commission to allow the public to search radio licenses, and the registry operated by the U.S. Patent and Trademark Office to allow the public to search currently registered patents and trademarks. Each of these systems has saved taxpayer money, while improving service to the public.

Just as government agencies gave up the horse and buggy for the automobile, it is time for the IRS to move from a decentralized, paper-based tax lien filing system to an electronic national tax lien registry. But the IRS’ hands are tied, until the Congress changes the laws holding back modernization of the federal tax lien filing system.

What the Bill Does

The bill we are introducing today would make the changes necessary to enable the IRS to take immediate steps to simplify and modernize the federal tax lien filing system. The operative provisions would require the IRS to create a national registry for the filing of tax lien notices as an electronic database that is Internet accessible and searchable by the public at no cost. It would mandate the use of this system in place of the existing system of local filings. It would establish the priority of federal tax liens according to the date and time that the relevant notice was filed in the national registry, in the same way that priorities are currently established from the date and time of filing in local recording offices. The bill would also shorten the time allowed to release a tax lien, after the related tax liability has been resolved, from 30 days to 10 days.

To establish this new electronic filing system, the bill would give the Treasury Secretary express authority to issue regulations or other guidance governing the establishment and maintenance of the registry. Among other obligations, Treasury would be required to ensure that the registry was secure and prevent data tampering. In addition, prior to the implementation of the national registry, the Treasury Secretary would be required to review the information currently included in public tax lien filings to determine whether any of that information should be excluded or protected from disclosure on the Internet. For example, the Treasury Secretary would be expected to prevent the disclosure of social security numbers that are currently included in many public tax lien filings, but if disclosed on the Internet, could facilitate identity theft. While such identifying information could continue to be included in a tax lien filing to ensure that the filing is directed toward the correct person, the registry could be constructed to prevent such information from being disclosed publicly and to instead provide such information only upon request from appropriate persons involved in the enforcement of the tax lien or collection of the tax debt. By requiring this information review prior to implementing the national tax lien registry, the bill is expected to provide greater protection of some taxpayer information than occurs in current tax lien filings.

The bill would require the Treasury Secretary to establish a functioning tax lien registry by January 1, 2009, but would also allow the IRS to continue to use the existing paper-based tax lien filing system, in parallel with the new system, for an appropriate period to ensure a smooth transition. The IRS has indicated that it would be able to establish an electronic tax lien filing system within the specified time period.

Reasons for Change

Moving to a centralized, electronic tax lien filing system, an Internet-based National Registry of tax liens, would accomplish at least three objectives. It would save taxpayer dollars, speed the process for filing and releasing tax liens, and simplify the process for researching federal tax liens for taxpayers and creditors.

The IRS estimates that moving from a paper-based, locally filed tax lien system to an Internet-based, federal tax lien filing system would save about $570 million over ten years. That’s half a billion dollars in cost savings. These savings would come from the elimination of state filing fees, IRS personnel costs, travel costs related to local filing problems, and the cost of lost taxes whenever the IRS makes an error or a tax lien filing is misplaced or delayed. Filing fees, for example, vary widely from state to state, but typically cost at least $10 per filing, and in some states cost as much as $150. If a taxpayer has real estate in multiple jurisdictions, those costs multiply. Personnel costs include the IRS service center staff that is currently charged with filing tax liens nationwide and complying with the myriad filing rules in effect in the 4,100 recording offices across the country. Additional anticipated savings would come from reduced mailing and travel costs.

Electronic filing would not only save money, it would improve taxpayer service. Taxpayers who are the subject of a tax lien filing, for example, would benefit from a centralized registry in several ways. First, taxpayers would be able to review their liens as soon as they are filed online, without having to make a physical trip to one or more local recording offices. Second, taxpayers would have an easy way to look up their liens on multiple occasions, identify any problems, and correct any errors. Third, once the underlying tax liability was resolved, the IRS would be required to release the tax lien in 10 days, instead of the 30 days allowed under current law. The longer 30-day period is necessitated by the current complexities associated with filing a paper lien in one or more local offices, complexities that would be eliminated by the establishment of a centralized, electronic registry.

Creditors who need to research federal tax liens would also benefit from a centralized, electronic registry. Lenders, security holders and others, for example, would be able to use a simplified search process that could take place online and would not require physical trips to multiple locations. Simplifying the search process would also provide greater certainty that all tax liens were found. The ability to research federal tax liens remotely and instantaneously should be of particular benefit to larger lenders and to creditors of taxpayers with widely distributed assets.

Conclusion

Federal tax liens are not a topic that normally excites the public’s interest. Sound tax administration, however, requires attention to administrative as well as enforcement concerns. Federal law is currently impeding development of a more efficient, cost effective tax lien filing system. Amending the law as indicated in the Tax Lien Simplification Act to streamline the tax lien filing system, moving it from a paper-based to an electronic-based system, would not only advance the more efficient, cost-effective tax system we all want, it would also save half a billion dollars in taxpayer money. At the same time, it would make the system work better for individual taxpayers by reducing the possibility for mistakes and speeding up the release of liens for taxpayers who have paid. Modernizing our tax lien filing system makes sense in every way. I urge my colleagues to join Sen. Coleman and myself in enacting this bill into law this year.

I ask unanimous consent to include in the record following these remarks a section-by-section analysis of the bill.