Federal Tax Liens
- 1 When does a federal tax lien arise?
- 2 Does the address on the Notice mean that the lien only affects that property?
- 3 What about parties dealing with the property of the taxpayer before a notice is filed?
- 4 What is the duration of the lien?
- 5 How else can a notice of tax lien be released?
- 6 Purchase Money Mortgage and Federal Tax Liens
- 7 Can a Tax Lien be Foreclosed Out? What rights of Redemption?
- 8 Effect of Tenancy By Entireties and Joint Tenancy
- 9 Tax Liens and Single Member LLCs
When does a federal tax lien arise?
When the assessment is made that taxes are due and not paid without any notice to the delinquent taxpayer or anyone else. It is a secret lien until a notice of the lien is recorded in the land records. The lien attaches to all property of the taxpayer at the time of the assessment and any property acquired by the taxpayer subsequently.(26 U.S.C. §6321)
Does the address on the Notice mean that the lien only affects that property?
No. The lien attaches to all property of the taxpayer and only property of the taxpayer. The address on the lien is the taxpayer’s residence address according to the records of the IRS. If the taxpayer’s residence is a month to month rental, then the lien would not affect the address described in the lien except to the extent of the taxpayer’s tenancy.
What about parties dealing with the property of the taxpayer before a notice is filed?
The Internal Revenue Code provides that the lien is not valid as against purchasers, secured lenders, mechanics lien creditors and judgment lien creditors without actual knowledge of the lien who record their interest before the notice of tax lien is filed.(
What is the duration of the lien?
The lien, as opposed to the notice of the lien, continues so long as any portion of the liability remains outstanding. However, the Notice of lien has is only is only effective for a period of ten years and 30 days after the assessment unless extended by refilling. The last date for refilling is shown on the face of the notice of lien and there is language on the notice that failure to refile by the last refilling date operates as a release.
How else can a notice of tax lien be released?
Upon payment of all obligations secured by the lien, the IRS will discharge the lien by a written, recordable discharge. However, do not rely on the Unpaid Balance of Assessment shown on the lien itself because there may be significant penalties and interest that have accrued. The IRS must be consulted to determine the amount of the payoff.
There are also procedures covering for partial releases of specific property or abandonment of the lien as worthless. Again the IRS must be consulted. There is also a procedure where there could be confusion as to the identity of the taxpayer for the IRS to provide a certificate of non-attachment. All of these procedures take time and are completely discretionary with the IRS.
Purchase Money Mortgage and Federal Tax Liens
A Purchase Money Mortgage or security interest, valid under local law is protected, even though it may arise after a notice of Federal tax lien has been filed against the purchaser. Revenue Ruling 68-57; IRS Publication 785 U.S. v. Heptner, (MD FL 2016)
However, a FTL against the seller has already attached and will be superior to the new mortgage.
you do not need a certificate of subordination from the Internal Revenue Service for a PMM, and a certificate will not be provided if applied for
Can a Tax Lien be Foreclosed Out? What rights of Redemption?
While it is impossible in an article of this type to cover the foreclosure processes of 50 states, there are two common elements regarding tax liens that may affect title.
First, notice must be given to the U.S. Government. In a judicial foreclosure that is accomplished by serving the U.S. Attorney for the district with copies by Registered or Certified mail to the Attorney General in Washington. 28 U.S.C. §2410(b). In a non-judicial foreclosure, even in states where local practices may not require notice to subordinate lienholders, a notice of sale must be given, in writing, by registered or certified mail or by personal service, not less than 25 days prior to the sale, to the Advisory group manager, in the Field Collection Area where the sale is to be held. Internal Revenue Manual, § 184.108.40.206 (06-11-2010) 26 U.S.C. §7425(c)(1)). A foreclosure sale made without proper notice may still be subject to the tax lien.
Second, when an IRS lien is eliminated in foreclosure, the IRS has not less than 120 days from the date of sale within which to redeem. Judicial 28 U.S.C. §2410(c), Non-judicial 26 U.S.C. §7425(d)(1).
Steve Winkler 11-12-14
Correcting a Failure to Give Notice of a Non-Judicial Foreclosure
The tax law requires notice to the IRS of a non-judicial foreclosure at least 25 days prior to the sale. 26 U.S.C. 7425(c)(1)
In US v. Nipper, 889 F.Supp.2d 1260 (D.NM, 2012) the court held a timely notice that actually went to the U.S. Attorney General, the U.S. Attorney for the District of New Mexico, and the Secretary of the Treasury, was not sufficient notice -- because those are not the parties/places designated in the IRS regs. And a notice after the sale to the right persons and places in IRS regs also wasn’t sufficient to divest the tax lien. So the next owner took subject to the FTL.
There is no “sale” in a strict foreclosure, just notice of a date by which s junior lienholder must redeem. The question has been raised whether it is sufficient to give a notice to the IRS under 26 U.S.C. 7425 and IRS Reg 301.7425-3 and that will eliminate the lien, or whether after the strict foreclosure the owner must still seek a Certificate of Release, a Certificate of Discharge of the Property, or a Certificate of Nonattachment from the IRS.
subsection (4) of the IRS Reg 301.7425-3 provides for confirmation of the adequacy of the notice, not just its receipt.
“(4) Disclosure of adequacy of notice. The IRS is authorized to disclose, to any person who has a proper interest, whether an adequate notice of sale was given under paragraph (d)(1) of this section. Any person desiring this information should submit to the IRS a written request that clearly describes the property sold or to be sold, identifies the applicable notice of lien, gives the reasons for requesting the information, and states the name and address of the person making the request. The request should be submitted to the IRS official, office and address specified in IRS Publication 4235, “Technical Services (Advisory) Group Addresses,” or any successor publication. The relevant IRS publications may be downloaded from the IRS Internet site at http://www.irs.gov.”
Effect of Tenancy By Entireties and Joint Tenancy
For many years there was uncertainty as to whether a federal tax lien could attach to the interest of only one tenant. (If both spouses were liable, the general rule was that a federal tax lien could attach to the tenancy by the entirety.) In United States v. Craft, 535 U.S. 274 (2002), the Supreme Court held that the federal tax lien may attach to the tenancy by the entirety when only one spouse had a federal tax liability.
As a general rule, the value of the taxpayer's interest in entireties property will be deemed to be one-half. Accord Popky v. United States, 419 F.3d 242, 245 (3d Cir. 2005); United States v. Barr, 617 F.3d 370, 373 (6th Cir. 2010), cert. denied, 131 S. Ct. 1678 (2011). But see Pletz v. United States, 221 F.3d 1114, 1117-18 (9th Cir. 2000) (using actuarial tables). Craft declined to address the valuation of each spouse’s individual interest in the property. 535 U.S. at 289.
Where there has been a sale or other transfer of entireties property subject to the federal tax lien that does not provide for the discharge of the lien, whether the transfer is to the non-liable spouse or a third party, the lien thereafter encumbers a one-half interest in the property held by the transferee.
However, knowing that the tax lien may attach to the taxpayer's interest in entireties (or JTROS) property does not address what happens to the tax lien on the death of the taxpayer -- and the automatic transfer of the property to the surviving spouse or surviving joint tenant.
Death of Co-Tenant in JTROS
In most states, if the individual, against whose property a federal tax lien attaches, dies before any of the other joint tenants, then the lien ceases to attach to the property. However, if the same individual is the last survivor of the joint tenants, the tax lien then attaches to the entire property. See Internal Revenue Bulletin: 2003-39 and Part 5. Collecting Process, Chapter 17. Legal Reference Guide for Revenue Officers, Section 2. Federal Tax Liens
In a few states, however, this is not the rule because of unique statutory or case law provisions that cause a lien against JTROS property to continue in the hands of the surviving spouse.
Wisconsin is an exception to the general rule: if the federal tax lien has attached to the interest of one joint tenant who then dies, the surviving joint tenant takes the property encumbered with the federal tax lien. United States v. Librizzi , 108 F.3d 136 (7th Cir. 1997). W.S.A. 700.24
Connecticut was also an exception to the general rule. Conn. Gen. Stat. 47-14f. however it appears that statute may have been repealed.
See also Paternoster v. United States, 640 F.Supp.2d 983 (S.D. Ohio 2009). R.C. § 5302.20
Accordingly, state law should always be consulted to determine whether there is an exception to the general rule
Tenancy by Entireties
As is the case with joint tenancy with the right of survivorship, if a taxpayer’s interest in entireties property is extinguished by operation of law at the death of the taxpayer, then there is no longer an interest of the taxpayer to which the federal tax lien attaches. When a taxpayer dies, the surviving non-liable spouse takes the property unencumbered by the federal tax lien.
When a non-liable spouse predeceases the taxpayer, the property ceases to be held in a tenancy by the entirety, the taxpayer takes the entire property in fee simple, and the federal tax lien attaches to the entire property.
The rule that the federal tax lien does not survive the death of the taxpayer does not apply if the entireties estate previously has been terminated. For example, if the property has been conveyed to a third party, the federal tax lien will be deemed to encumber a one-half interest in the hands of the transferee and will not be affected by the subsequent death of either spouse.
See Q4, Internal Revenue Bulletin: 2003-39
Presumably, the same analysis as was applied to JTROS property should be made as to any state law exceptions to the continuation of the lien, and, of course, confirming the recognition of Tenancy by Entireties in the state.
The general rule is that in community property states, a federal tax lien will always attach to all of the liable spouse's separate property. Also, the tax lien will always attach to at least the liable spouse's half interest in community property.
This becomes an issue when the non-liable spouse has titled property as sole and separate property. The Internal Revenue Manual Part 25 outlines principals of community property law and includes a state by state table of their interpretations of key community property issues. Question 10 of Exhibit 25.18.1-1 sets forth the IRS conclusions to this question for various community property states.
Other Terminable Interests
Terminable interests are interests a taxpayer may have that, by definition, terminate upon the death of the party holding the interest, such as a life estate in property, or a contract right that will terminate at some time, e.g., an option.
The federal tax lien may attach to such an interest before it terminates. However, once the interest terminates, the federal tax lien on that interest also terminates. United States v. Swan, 467 F.3d 655 (7th Cir. 2006); Rev. Rul. 54-154, 1954-1 C.B. 277.
Example: Assume taxpayer has an option to purchase Whiteacre. The federal tax lien attaches to that option. If the taxpayer, however, never exercises the option, the option will lapse. After the lapse, the federal tax lien no longer attaches to the option.
Similarly, in the case of a life estate, the federal tax lien clearly attaches to the life tenant’s interest and may be enforced against that interest so long as the life tenant lives. However, upon the death of the life tenant, the lien ceases to attach to the property since the Government’s tax lien rights do not exceed the taxpayer’s right to the property. Part 5. Collecting Process, Chapter 17. Legal Reference Guide for Revenue Officers, Section 2. Federal Tax Liens
Tax Liens and Single Member LLCs
A single member LLC is treated as a disregarded entity for federal and state tax purposes, which raises the question of whether a tax lien against the single member attaches to the assets of the LLC. The answer turns on whether state law treats the LLC as a separate legal entity, distinct from its member. That is the treatment in most states we have examined.
The IRS has issued this informal guidance in the past confirming the non-attachment.
The caution here is that the membership interest is owned by the member who is subject to the lien, so the lien attaches to the membership interest and to any distributions from the LLC. The extent to which the IRS can “execute” on the membership interest is also a question of state law. Some states limit the remedy to a charging lien, so that there is nothing to grab unless and until a distribution is declared.