The Federal Tax Lien
The IRS has exactly three legal requirements to satisfy prior to the creation of a federal tax lien (FTL) on all the delinquent taxpayers’ property.
- Formally assess the tax
- Issue first notice and demand for payment of the tax (the CP 14 suffices)
- The tax goes unpaid
At the instance the taxpayers refuse or neglect to fully pay the tax assessment (including interest and penalties associated with that assessment) a lien in favor of the IRS arises on all the property and rights to property (including property acquired in the future) of the taxpayers. All property includes, of course, assets and income of all types, including houses, salaries, and pension assets such as IRAs and 401(k) accounts.
The Notice of Federal Tax Lien
Generally, taxpayers are unaware that the tax lien has come into being, and there is no public record of it. Also, the IRS will not divulge the fact that any particular taxpayer owes back taxes to anyone outside of the taxpayers themselves or their attorney, or other person listed as their representative.
However, that all changes when the IRS files a Notice of Federal Tax Lien (NFTL). As with a financing statement under secured transaction law (UCC-9) or even mortgages, the IRS records a document, usually in the county clerk’s office where the taxpayers reside. The purpose of this notice is to establish the IRS’ rights against other creditors of the taxpayers in the taxpayers’ property.
For example, if the taxpayers own a house, most likely they have a mortgage on that house. The IRS files its notice of lien, thereby securing a second position on that house. This warns a potential lender that if they chose to grant the taxpayers a second mortgage, that lender will be in third position in relation to that house.
The IRS is not required to file a notice of federal tax lien prior to taking enforced collection action. Remember, the lien arises as soon as the IRS demands payment of a tax, and the tax goes unpaid. The IRS is free to levy (take) a taxpayer’s property to pay the lien, after the proper notice of intent to levy has been issued and expired.
Release of lien
Generally, the IRS will issue a Certificate of Release of Federal Tax Lien, when the tax (including penalties and interest to the date of payment) is paid. The release is filed in the same location as the notice of lien.
Collection statute of limitations
Also, there is a ten year statute of limitations for collection of federal taxes. The ten year clock starts to run when the tax is formally assessed (assessment date will be on the face of the notice of lien).
The notice of lien will self-release thirty days after the ten year clock has run out. In most cases, the self-release date will be printed on the face of the notice of lien, in column e.
However, many events will suspend (toll) the statute of limitations. These events stop the ten year clock. After these events are concluded, the clock will begin to run again. But, there may be additional time tacked onto the ten years. For example, filing a bankruptcy stops the clock from the date the bankruptcy case is filed until the case is dismissed, closed, or discharged, plus six months. So, if a taxpayer was in a bankruptcy case for one year, 18 months would be added to the ten year clock.
The tax lien related law suits
In very rare cases, when the ten year clock is about to expire, the IRS will sue a taxpayer in federal court to reduce a tax lien to a judgment. Usually, the taxpayer has a large tax liability about to expire and has some asset the IRS cannot get to in time. Many times, the asset is an expensive house or co-op apartment. If the judgment is granted, which it usually will be, the IRS will have a judgment lien on the taxpayer’s property for a further 20 years.
Again in rare cases, the IRS may file suit against taxpayers to foreclose on a federal tax lien. The law allows the IRS to seize (levy) and sell real property of a taxpayer administratively (without a court order). However, in some cases, the title to the property may be clouded or confused enough that the IRS wants a court order to insure that clear title can be passed to potential buyers.
Unsolicited tax representation
Many times the filing of these notices is the harbinger of more aggressive collection action. Oh, and don’t be surprised if you start receiving a storm of mail from so-called “tax resolution” firms (that are not lawyers) offering to help you with your tax problem. These companies comb through public records looking for taxpayers that have recently had lien notices filed against them. Once they locate you, they will bombard you will mail advertising. Many times, their letters will mimic government notices, which will trick taxpayers into thinking the mailing is from the IRS. This tactic prompts the taxpayer to call the company. Some of these companies have recently been in the headlines for corrupt practices so be careful when you decide to pay for representation.