What is a lien?  A lien is a claim on another’s property for the payment or satisfaction of a debt.  IRS tax liens are created by federal statute rather than by civil judgments or county recorded lender/debtor agreements.

IRS tools for collection actions against tax debtors are unlike that of any other creditor.  Creditor lenders and successful plaintiffs must obtain judicial orders for seizure of debtor assets.  Federal statutes authorize IRS seizure authority without judicial order.  The IRS process is speedy and immensely effective.

What is a federal tax lien?  The general tax lien, also called a “statutory lien”, is the basis of all enforced IRS collection actions.  A lien is not a levy.  The federal “statutory tax lien” is the basis which eventually allows the Internal Revenue Service in time to issue a levy and/or file a county recorded lien on taxpayer’s property.   The Notice of Federal Tax Lien, filed in a county Recorder’s Office, is not a levy or a “statutory tax lien”.  It is a lien on real estate situated in the county of lien filing.  Credit bureaus also review county lien filings for taxpayer credit worthiness.

A basic understanding of the mechanics of a tax assessment is helpful in understanding the eventual liens and levies.  A tax assessment of a taxpayer’s liability is the recording of the liability in 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 the date that a “statutory tax lien” arises against a taxpayer as well as the starting date for the running of the 10 year collection statute of limitations.  At this point, even though an actual notice of lien has not been filed in a county Recorder’s Office, the tax assessment has created a valid statutory tax lien (assessment).  The relevant Code Section IRC 6321 creates this “statutory tax lien” upon all of the taxpayer’s property which, with further proper taxpayer notices, underlies the IRS authority for bank levies and wage garnishments.  The later issued registered mailing of the “Notice of Intent to Levy with Right to a Hearing” (Notice CP504) is the notice underlying the IRS authority to levy and garnish within 30 days of notice.

We will now turn our attention to the document called the “Notice of Federal Tax Line”.  This is a document (Form 668) which is filed by the IRS in the county of the taxpayer’s residence and/or the county of the taxpayer’s business.  This is the first notice to the world of individual or business federal tax deficiencies.  This type of lien filing dramatically impacts credit worthiness.

It is the “Notice of Federal Tax Lien” that most taxpayers view as the federal tax lien.  It is a secured lien on the taxpayer’s real estate in the county of filing.  A taxpayer cannot sell real estate or mortgage real estate encumbered by an outstanding “Notice of Federal Tax Lien” without IRS involvement (payment) to clear title or subordinate the tax lien.  The IRS will subordinate their lien to new lenders and will issue a Subordination of Lien document so that a taxpayer can sell real estate.  Obtaining such necessary IRS paperwork for liened real estate, on the other hand, always involves dealing with the IRS bureaucracy and usually requires a full or partial payment of the outstanding tax liability.  IRS lien subordinations can be issued without any payment in some circumstances.

Prior to a “Notice of Federal Tax Lien” being filed in the county recorder’s office, three events must occur:

  1. A tax assessment must have been made and the “statutory tax lien” must have posted on IRS Service Center records as discussed above.
  1. The taxpayer must be given written notices of the tax deficiency and a demand for payment must have been made.
  1. The taxpayer must have neglected or refused to pay the deficiency amount.
  1. The IRS then files the recorded lien.

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

  • A federal tax lien does not divest the taxpayer of his property or his rights to transfer property. A filed lien transfers constructive ownership of equity in the property to the government.
  • On December 4, 2015, Congress passed legislation which includes changes to the IRC. The IRS can now revoke or deny taxpayers passport privileges if they owe delinquent taxes and payment demands have fallen on deaf ears.
  • Once a “statutory tax lien” exists, the IRS need only send the taxpayer a registered letter of notice enabling the IRS to levy upon and seize the taxpayer’s assets or his wages. A 30 day grace period for the payment of the tax is reflected in the “Notice of Intent to Levy with Right to Hearing”.  A taxpayer is also entitled to a hearing (IRC 6630) before a levy can be issued.  This right is outlined in the “Right to Hearing” registered letter.  The timeframe between the “statutory lien” date and the levy authority letter can vary considerably – from four months to several years.  Taxpayers are cautioned to read IRS “registered” mail very carefully as these letters spell out taxpayer rights on levy and lien matters.
  • 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 the filing of a “Notice of Federal Tax Lien” any purchaser of taxpayer’s property does so at his own peril unless they fall into categories of super-priority or other exemptions. For example, taxpayers may legally transfer automobiles to third parties who have no knowledge of the public tax lien filing, with the third party purchaser receiving a valid title to the vehicle.  Not so with real estate transfers when the real estate lien is public knowledge.
  • The “Notice of Federal Tax Lien” filing will negatively impact 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 intangible and tangible 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 in the county prior to the creditor’s lien. Once the “Notice of Federal Tax Lien” has been filed, it constitutes notice to creditors that the lien exists and that future property transfers by the taxpayer are burdened by the tax lien.  One exception to this rule is that purchase money lenders/mortgagees (financing the purchase of newly acquired real estate) obtain a superior lien to that of the IRS even though a “Notice of Federal Tax Line” was filed previous to the purchase.  The “purchase money mortgage” exception.
  • Mortgage lenders providing fresh money on a refinancing or equity loan on existing property will not have a priority over the IRS if a Notice of Tax Lien is in place at the time of the refinancing. The IRS does have lien subordination procedures which can provide a new lender (post lien) with priority over the federal tax lien.
  • 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 IRS Revenue Officers have discretion in when to file county liens.
  • The filing of a “Notice of Federal Tax Lien” is not a prerequisite to the IRS seizure of salary and wages and bank accounts in the hands of third parties. The 30 day registered letter (the Intent to Levy with a Right to Hearing Notice) and the prior existence of a “statutory tax lien” are the prerequisites for such seizure.
  • The Automated Collections System (ACS) branch of the IRS may record a “Notice of Federal Tax Lien” in the county of a taxpayer residence. Generally speaking, the notice will be filed in cases of tax deficiencies exceeding $10,000.
  • An IRS installment agreement for tax assessments less than $25,000 can result in an IRS agreement not to file a federal tax lien with the county recorder.
  • Prior to the enactment of the Restructuring and Reform Act of 1998, Revenue Officers and ACS personnel had complete freedom to record notices of federal tax liens. With the 1998 Tax Reform Act, however, collection personnel must secure a supervisor’s approval prior to issuing either a “Notice of Federal Tax Lien” or a levy based upon the “statutory tax lien”.  The taxpayer was also given post filing appeal rights on the filing of a Notice of the Filing of a Federal Tax Lien.
  • IRS must use private debt collections on more modest tax assessments. Collection agencies do not, however, have the authority to issue levies, garnishments or tax liens.  Studies show that private debt collectors are only responsible for 17% of collected tax debt compared to 83% for IRS Service Center collection actions and assigned IRS Revenue Officers.