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IRS LIENS AND LEVIES

What is a lien? A lien is a claim on another's property for the payment or satisfaction of a debt, obligation or duty. Tax liens are created by statute, rather than civil judgments, to insure the satisfaction of tax obligations to the government.

What is a federal tax lien? The general tax lien, often called a statutory lien, is the basis of all enforced IRS collection actions. A lien is not a levy. The federal tax lien is the statutory basis which allows the Internal Revenue Service to levy upon taxpayer's property.

The issuance of the statutory federal tax lien is governed primarily by Code Sections 2321, 2322 and 6303. Under Code Section 6321, a statutory tax lien arises automatically upon the assessment of federal tax. This is the statutory lien and is not the same as that which is represented by the formal filing of a "Notice of Tax Lien" as discussed below.

A basic understanding of the mechanics of a tax assessment is helpful in understanding liens. A tax assessment is the recording of a taxpayer's tax liability upon IRS records. This is an official act and is accomplished when an assessment officer at an IRS Service Center signs "Form 23-C" also called the "assessment certificate". The 23-C date is a very important date for IRS collection matters. The 23-C date is usually the date that a statutory tax lien arises. At this point, even though the lien has not been filed in the County Recorder's Office, it is a valid lien. Code Section 6321 creates this statutory lien upon all of the taxpayer's property.

We will now turn our attention to the document called the "Notice of Federal Tax Lien". This is a document (Form 668) which is filed by an IRS Revenue Officer in the county of the taxpayer's residence and/or the county of the taxpayer's business.

It is the "Notice of Federal Tax Lien" that most taxpayers consider as the federal tax lien. But, as discussed above, the tax lien is established earlier on the 23-C date at or near the time of the actual tax assessment. The "Notice of Federal Tax Lien", on the other hand, is the lien which is reported by credit bureaus. It is also a secured lien on the taxpayer's real estate in the county of filing. A taxpayer cannot sell real estate encumbered by an outstanding "Notice of Federal Tax Lien" without IRS involvement to clear title. The IRS will subordinate their lien to new lenders and will issue a Certificate of Lien Discharge so that a taxpayer can sell real estate. Obtaining appropriate IRS paperwork to do these things, on the other hand, always involves dealing with the IRS bureaucracy and usually involves a full or partial payment of the outstanding tax liability.

Prior to a "Notice of Federal Tax Lien" being filed, three events must occur:

1. A tax assessment must have been made and the statutory federal tax lien must have arisen as discussed above.
2. The taxpayer must be given a written notice of the tax deficiency and a demand for payment must have been made.
3. The taxpayer must have neglected or refused to pay the deficiency amount.

Lien law is extremely complicated. Below are find information which the reader may find useful:

• The statutory tax lien attaches to all property belonging to the taxpayer on the date of assessment (the 23-C date). The lien also attaches to after acquired property.
• A federal tax lien does not divest the taxpayer of his property or his rights to transfer property. A lien transfers constructive ownership of the property to the government.
• Once a statutory tax lien exists, the IRS need only give the taxpayer a written 10 day notice before the IRS can levy upon and seize the taxpayer's assets or levy his wages.
• Once a statutory tax lien exists, the government becomes the taxpayer's secured creditor. The government is entitled to payment before general and unsecured creditors even in a bankruptcy setting.
• After a Revenue Officer files a "Notice of Federal Tax Lien" persons buying property from the taxpayer do so at their own peril unless they fall into categories of super-priority or other exemptions. For example, taxpayers may transfer automobiles to third parties who have no knowledge of the tax lien with that third party receiving a valid title to the automobile.
• The filing of a "Notice of Federal Tax Lien" will severely hurt the taxpayer's credit rating.
• The Notice of Federal Tax Lien interferes with the transfer of most property to which a paper title is necessary (real estate and tangible personal property subject to recorded security agreements or UCC filings).
• Federal tax liens are not valid against prior mortgage holders, holders of security interests, mechanic's lien creditors and judgment lien creditors unless a "Notice of Federal Tax Lien" was recorded prior to their lien. Once the "Notice of Federal Tax Lien" has been filed, it constitutes notice to these creditors that the lien exists and that property transferred by the taxpayer continues to be burdened by the tax lien. One exception to this rule is that purchase money lenders/mortgagors (a newly financed purchase) obtain a superior lien than that of the IRS even though a "Notice of Federal Tax Lien" had previously been filed.
• There are no specific statutory guidelines governing the filing of the "Notice of Federal Tax Lien". Provisions of the Internal Revenue Manual control the filing and Revenue Officers do have discretion in filing or not filing liens in certain instances.
• The filing of a "Notice of Federal Tax Lien" is not a mandatory prerequisite prior to the IRS seizure of salary and wages and bank accounts in the hands of third parties. The 10 day notice of intent to levy and the existence of a statutory tax lien are the prerequisites to such seizure.
• The filing of a "Notice of Federal Tax Lien" is mandatory, however, prior to the IRS instituting levy action on property in the possession of the taxpayer himself.
• The Automated Collections System (ACS) branch of the IRS may record a "Notice of Federal Tax Lien" against a taxpayer. Generally speaking, the notice will be filed in cases of deficiencies exceeding $5,000.00 or more and will generally be automatically filed if the taxpayer has defaulted on an installment agreement.
• Prior to the enactment of the Restructuring and Reform Act of 1998 (RRA '98), Revenue Officers and ACS personnel had complete freedom to record notices of federal tax liens. With the 1998 Act, however, collection personnel must secure a supervisor's approval prior to issuing either a "Notice of Federal Tax Lien" or a levy.