Tax Liens

Tax Liens in regards to Property

Tax liens in connection with property taxes

Unlike personal debts, tax liens on real estate “run with the land”; that is, a property owner becomes responsible for payment even if the tax obligation was incurred by a prior owner. Depending on the law of the State or jurisdiction, the owner of the property may also be personally liable for payment of the taxes.

Payment of a tax lien may occur through various methods:

  • Payment may be made directly by the property owner or, in many cases, indirectly by the mortgage holder using an escrow account. Notice is given both to the property owner and mortgage holder when a property tax is delinquent; thus, even if the property owner does not have an escrow account on the mortgage, the mortgage company will receive notice of the delinquency and may pay the tax. The mortgage company will then demand repayment from the owner/borrower and/or create an escrow account to recoup the proceeds, since the mortgage company might lose some of the value of its mortgage lien if the property were sold by the taxing agency to satisfy unpaid taxes foreclosure.
  • If a property is sold by the owner prior to tax foreclosure by the government body, the tax lien (which is generally discovered as part of a title search) is usually paid as part of closing costs from the sale proceeds.
  • Procedures vary from State to State. Generally, in the event a tax lien on personal property is not paid within a specified time (and after several notices are generally given), the property may be seized and sold at foreclosure sale. On real property, one of two methods may be used: either the property may be seized and sold (a tax deed sale), or in some States the tax lien may be offered to investors (in the form of a tax lien certificate) with an accompanying right for the investor, after a specified period of time, to institute foreclosure proceedings (a tax lien sale).

 

Federal tax lien in the United States

In the United States, the Federal tax lien may arise in connection with any kind of Federal tax, including but not limited to income tax, gift tax, or estate tax.

 

 Federal tax lien basics

Internal Revenue Code section 6321 provides:

Sec. 6321. LIEN FOR TAXES.
If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belong to such person.[1]

The term “assessment” refers to the statutory assessment made by the Internal Revenue Service (IRS) under 26 U.S.C. § 6201 (that is, the formal recording of the tax in the official books and records of the U.S. Department of the Treasury). Generally, the “person liable to pay any tax” described in section 6321 must pay the tax within ten days of the written notice and demand.[2] If the taxpayer fails to pay the tax within the ten day period, the tax lien arises automatically (i.e., by operation of law), and is effective retroactively to (i.e., arises at) the date of the assessment, even though the ten day period necessarily expires after the assessment date. Internal Revenue Code section 6322 provides:

Sec. 6322. PERIOD OF LIEN.
Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.[3]

Under the doctrine of Glass City Bank v. United States[4], the tax lien applies not only to property and rights to property owned by the taxpayer at the time of the assessment, but also to after-acquired property (i.e., to any property owned by the taxpayer during the life of the lien).

The statute of limitations under which a Federal tax lien may become “unenforceable by reason of lapse of time” is found at 26 U.S.C. § 6502. For taxes assessed on or after November 6, 1990, the lien generally becomes unenforceable ten years after the date of assessment. For taxes assessed on or before November 5, 1990, a prior version of section 6502 provides for a limitations period of six years after the date of assessment. Various exceptions may extend the time periods.

 

Perfection of Federal tax liens against third parties (the Notice of Federal Tax Lien)

A Federal tax lien arising by law as described above is valid against the taxpayer without any further action by the government.

The general rule is that where two or more creditors have competing liens against the same property, the creditor whose lien was perfected at the earlier time takes priority over the creditor whose lien was perfected at a later time (there are exceptions to this rule). Thus, if the government (which is treated as a “creditor” with respect to unpaid taxes) properly files a Notice of Federal Tax Lien (NFTL) before another creditor can perfect its own lien, the tax lien will often take priority over the other lien.

To “perfect” the tax lien (to create a priority right) against persons other than the taxpayer (such as competing creditors), the government generally must file the NFTL[5] in the records of the county or state where the property is located, with the rules varying from state to state. At the time the notice is filed, public notice is deemed to have been given to the third parties (especially the taxpayer’s other creditors, etc.) that the Internal Revenue Service has a claim against all property owned by the taxpayer as of the assessment date (which is generally prior to the date the NFTL is filed), and to all property acquired by the taxpayer after the assessment date. (As noted above, the lien attaches to all of a taxpayer’s property such as homes, land and vehicles and to all of a taxpayer’s rights to property such as promissory notes or accounts receivable.) Although the Federal tax lien is effective against the taxpayer on the assessment date, the priority right against third party creditors arises at a later time: the date the NFTL is filed.

 

Subsequent liens taking priority over previously filed Federal tax liens

In certain cases, the lien of another creditor (or the interest of an owner) may take priority over a Federal tax lien even if the NFTL was filed before the other creditor’s lien was perfected (or before the owner’s interest was acquired). Some examples include the liens of certain purchasers of securities, liens on certain motor vehicles, and the interest held by a retail purchaser of certain personal property.[6]

Federal law also allows a state — if the state legislature so elects by statute — to enjoy a higher priority than the Federal tax lien with respect to certain state tax liens on property where the related tax is based on the value of that property. For example, the lien based on the annual real estate property tax in Texas takes priority over the Federal tax lien, even where an NFTL for the Federal lien was recorded prior to the time the Texas tax lien arose[7], and even though no notice of the Texas tax lien is required to be filed or recorded at all.

 Notice of release of Federal tax lien

In order to have the record of a lien released a taxpayer must obtain a Release of the Notice of Federal Tax Lien.[8] Generally, the IRS will not issue a notice of release of lien until the tax has either been paid in full or the IRS no longer has a legal interest in collecting the tax. The IRS has standardized procedures for lien releases, discharges and subordination. In situations that qualify for the removal of a lien, the IRS will generally remove the lien within 30 days and the taxpayer may receive a copy of the Certificate of Release of Federal Tax Lien.

The difference between a Federal tax lien and an administrative levy

The creation of a tax lien, and the subsequent issuance of a Notice of Federal Tax Lien, should not be confused with the issuance of a Notice of Intent to Levy under 26 U.S.C. § 6331(d), or with the actual act of levy under 26 U.S.C. § 6331(a). The term “levy” in this narrow technical sense denotes an administrative action by the Internal Revenue Service (i.e., without going to court) to seize property to satisfy a tax liability. The levy “includes the power of distraint and seizure by any means.[9] The general rule is that no court permission is required for the IRS to execute a section 6331 levy.[10].

In other words, the Federal tax lien is the government’s statutory right that encumbers property to secure the ultimate payment of a tax. The Federal tax levy is the actual seizure of that property.

In general, a Notice of Intent to Levy must be issued by the IRS at least thirty days prior to the actual levy. Thus, while a Notice of Federal Tax Lien generally is issued after the tax lien arises, a Notice of Intent to Levy (sometimes misleadingly called simply a “notice of levy”) generally must be issued before the actual levy is made.

Also, while the Federal tax lien applies to all property and rights to property of the taxpayer, the levy is subject to certain restrictions. That is, certain property covered by the lien may be exempt from an administrative levy.[11] (Property covered by the lien that is exempt from administrative levy may, however, be taken by the IRS if the IRS obtains a court judgment.)

A detailed discussion of the administrative levy, and the related Notice, is beyond the scope of this article.

In connection with Federal taxes in the United States, the term “levy” also has a separate, more general sense of “imposed.” That is, when a tax law is enacted by the Congress, the tax is said to be “imposed” or “levied.”

Notes

  1. ^ 26 U.S.C. § 6321.
  2. ^ See 26 C.F.R. section 601.103(a).
  3. ^ See 26 U.S.C. § 6322.
  4. ^ 326 U.S. 265 (1945).
  5. ^ See 26 U.S.C. § 6323.
  6. ^ 26 U.S.C. § 6323(b).
  7. ^ See 26 U.S.C. § 6323(b)(6) and Tex. Tax Code sections 32.04 and 32.05(b).
  8. ^ See 26 U.S.C. § 6325.
  9. ^ See 26 U.S.C. § 7701(a)(21) and 26 U.S.C. § 6331(b) (italics added).
  10. ^ See Brian v. Gugin, 853 F. Supp. 358, 94-1 U.S. Tax Cas. (CCH) paragr. 50,278 (D. Idaho 1994), aff’d, 95-1 U.S. Tax Cas. (CCH) paragr. 50,067 (9th Cir. 1995). The IRS may, however, be required to obtain court permission in the case of bankruptcy; see 11 U.S.C. § 362.
  11. ^ See 26 U.S.C. § 6334.