IRS collections – Federal Tax Liens

IRS collections – Federal Tax Liens

Anyone who has been in trouble with IRS tax debt probably has some experience with a federal tax lien.

How a Federal Tax Lien is Created

After the IRS makes a tax assessment (when you file your return, through an audit adjustment, or an amended return filing), the IRS is required to give notice and demand for payment within 60 days. If the taxpayer fails to pay, a tax lien arises and attaches to all property owned on or after the date of the tax assessment. A lien continues until the underlying tax liability is satisfied. If it is not, then the lien will exist for the entire 10-year collections statute of limitations period.

A lien is only an encumbrance – it does not result in an actual transfer of property. For an actual transfer of property, the IRS must levy upon the property. Levies can either be directed to the taxpayer to seize tangible real and personal property belonging to the taxpayer, or it can be served on third parties such as banks and employers to levy bank deposits and wages. In FY2015, IRS levies on third parties totaled 1,464,026.

What Property is Subject to an IRS Tax Lien?

The general rule is that a federal tax lien attaches to all property and rights to property, both real and personal that belong to the taxpayer under IRC § 6321.

  • Real Property. This includes primary residences, secondary residences, land, and rental properties. The homestead exemption does not apply to a federal tax lien.
  • Personal Property. Personal property can include money, goods, tangibles (e.g. jewelry, cars, tools), and intangible property. Additional personal property subject to a federal tax lien includes bank accounts, insurance proceeds, retirement plans, pension plans, trusts, licenses, and franchises.

Note: For married couples in Texas, a community property state, there are a number of factors that may determine which property is subject to a tax lien, such as 1.) whether the debt was incurred prior to or after marriage, 2.) whether the couple have separate property, and 3.) whether the filing status is married filing jointly or separately.

Filing of a Federal Tax Lien

While is not necessary for a federal tax lien to be filed or recorded to be valid against the taxpayer, the IRS often does file a Notice of Federal Tax Lien with the County Clerk in order to have priority over other creditors.

Procedures for filing: For real property, the lien is filed in the county where the property is located. And for personal property, the lien would be filed in the county where the taxpayer resides.

Procedures for notifying taxpayers: IRC § 6320 requires the IRS to notify taxpayers in writing at their last known address within 5 business days of the filing of a Notice of Federal Tax Lien. While it is required to be sent via certified mail, there is no requirement that the taxpayer must sign or physically accept the delivery to be valid notice.

Relief from a Federal Tax Lien

Every lien that is filed will eventually be released, either after payment, by entering into a payment plan, or expiration of the 10-year collections statute of limitations. For those concerned about their credit scores, a lien release is not enough. A released lien will remain on the taxpayer’s credit history for 7 years after it is released. Combined with the 10 year statute of limitations, that’s 17 years that a lien can affect your credit history!

Fortunately, pursuant to IRC § 6323(j)(1)(D) and clarified in an IRS Office of Chief Counsel memorandum (PTMA 2009-158), the IRS may withdraw a federal tax lien after it has been released. This is not automatic – the IRS must be petitioned to withdraw the lien by the taxpayer. If the IRS accepts, then credit reporting agencies will receive a notice of withdrawal of a Notice of Federal Tax Lien, thereby which they are required to delete any references to the tax lien in the taxpayer’s credit history. It’s essentially as if the lien never existed. Additionally, IRC  § 6323(j)(1)(B) allows the IRS to withdraw a lien when the taxpayer enters into an installment agreement and meets certain requirements.