Tax Lien

General Overview of a Tax Lien

When the tax is assessed, the IRS will send several notices demanding that taxpayers pay the amount of the tax debt they owe. The first notice of demand is requesting for payment within 10 days. After five weeks they send another notice “Reminder of Unpaid Tax”. Five weeks after that a second follow up notice “Overdue Tax,” requesting payment within 10 days. Five weeks later, a third notice is sent to the taxpayer requesting to pay their tax debts “Urgent­ Payment Required” notice. If the taxpayer does not respond then, a final notice before enforcement action will be sent after five weeks.

If the taxpayer does not respond a taxpayer delinquent account is created for the delinquent tax. At this phase taxpayers should expect the appointment of a revenue officer from the IRS district office. The main purpose of the revenue officer is to collect back taxes from you and find where your assets are to secure the tax debt through tax liens and ultimately tax levies or tax seizure.

The IRS policy is to contact the taxpayer before filing the tax lien. Ideally the IRS should try to determine your ability to pay and if a tax lien is adversely detrimental to your ability to pay your back taxes. The filing for notice of tax lien is not mandatory before wage levies or bank levies. The IRS must give a notice of levy. If the IRS decides to file a tax lien against a taxpayer for tax debt owed to the IRS, they will file Form 668(Y) (Notice of Federal Tax Lien Under Internal Revenue Laws.)

How it Arises

For a tax lien to be made, the IRS must have completed the tax assessment, sent a demand for payment and the taxpayers must have refused to pay the back taxes. The IRS does not need to secure court approval. Assessment time is crucial because on that date, the audit statute of three years is determined and also the collection statute of limitation is also determined.

IRS Procedure of Issuing a Tax Lien

The IRS is required that the officer filing the tax lien must obtain the supervisor’s review before filing a notice of tax lien, notice of tax levy, or property seizure. If the procedure is not followed by both the employee may be subject to IRS disciplinary actions. The approval procedure must ascertain the tax debt, the taxpayer’s ability to pay and the value of the property to be subject to the tax levy and the tax lien.

Impact of a Tax Lien

IRS tax lien may ruin taxpayer’s credit but it does not transfer the property to the IRS. The tax lien merely proves the IRS claim to such property. If the taxpayer sells the property, the IRS will, as a result of the claim, be guaranteed collection of the tax debt to the extent that there is enough equity to be liquidated in favor of the IRS.

The IRS will have to wait thirty days if it decides to seize the property thus serving the taxpayer intent to levy or seize the property. Then the IRS will have possession of the taxpayer’s property as is the case with a bank levy and wage levy.

People who deal with a taxpayer in good faith are protected from the tax lien. If persons purchases the property following the legal procedures say for recording the real property before the tax lien is filed, they are protected from the tax lien under Section 6323 (a). Otherwise if a tax lien is filed persons dealing with taxpayers will take the property subject to the tax lien.

Properties Subject to a Tax Lien

Before discussing a tax resolution or tax help available for an IRS tax lien, we need to explain what the properties subject to tax liens may be.

  1. Everyone associates an IRS lien and lien release with real property such as land and buildings. Also the tax lien can attach to movable objects such as goods, autos, jewelry. What is usually not thought of as subject tot the tax lien are the intangibles such as trademarks and copyrights.

  2. The lien can attach to the individual and to business. If the tax debt belongs to the corporation, the lien can only be attached to the corporation and not to the corporate owners. The corporate shield protects them. Sometimes the corporate shield can be pierced. If you treat your corporation as if it did not exist, the shield may be pierced. If you write grocery checks for your personal consumption or if you ignore the formalities such as stockholders meeting and keeping minutes that also may be reason to pierce the corporate shield and subject you to the liability of the corporation itself (consult your attorney). Also a limited partner in a partnership is protected from the tax debt of the partnership. The general partner is not. Remember if the tax debt is a payroll tax debt then anyone who writes the checks (even non partners may be liable for payroll tax debt) regardless of the form of doing business. Limited Liability Company’s tax debt is the owner’s tax debt if the entity is discharged for tax purposes and the owner files his tax on schedule C. If the company is treated like a corporation then the tax debt (as in the case of the regular corporation) will be the corporation’s debt only.

  3. Lien can attach to your house or homestead although it is usually protected from other creditors. The IRS can put a lien on your home and sell it. The non delinquent spouse (which is an innocent spouse in this case) will be compensated to the extent of her share in the house from the sale proceeds.

  4. If you are the owner of a term life insurance policy, then the lien may not attach to it because there is no money to be attached except after death. If the policy has a cash surrender value then the lien can attach to the value to satisfy the back taxes.

  5. The IRS will attach a lien to the Retirement plans to satisfy your tax debt if the plan is in the payment mode but will not attach the lien if you are not retired and are not receiving distribution.

Early distribution from a retirement plan will be exempt from early withdrawal penalty of 10% if the IRS levies the amount. So the smart thing to do is not for you to receive the distribution to payoff your tax debt, but to instead to let the IRS levy the amount from your retirement.

How Long a Tax Lien Lasts

The tax lien will expire by either paying the tax debt or the expiration of the statute of limitation on collection which is 10 years. The ten year statute may not be waived beyond the ten years by agreement except when the taxpayer is applying for an offer in compromise and agrees to extend the collection statute while the offer is being considered. Also if the taxpayer negotiates an installment agreement the collection statute of limitation may extend up to 90 days after the installment period.

Tax Lien in Community Property States

There are eight community property states. Generally if the tax debt belongs to one spouse, the innocent spouse has tax relief in her interest in community property proceeds. Whether the tax lien will attach to the community property including the innocent spouse share in the community property will depend on the state definition of the community property. One state may allow the tax lien to attach to the whole community property, while another will not.

Taxpayer Due Process

The taxpayer has the right of notice. Then the right to a hearing within 30 days after the five days following the filing of the lien notice. The hearing is conducted by an Appeal Officer who was not originally involved in the collection case.

Releasing a Tax Lien

An IRS tax lien is established when there is a tax debt owed to the IRS. The IRS must assess the taxes first. Assessment of taxes establishes the tax liability. The date of the assessment is important. It establishes the collection statute of limitation. The collection statute of limitation is the date after which the IRS cannot collect for back taxes. It also establishes other dates for audit purposes and others. The IRS must also send you many notices to pay the tax and that it will file the tax lien before the lien is attached.

If you fail to pay your tax debt, a tax lien will be filed. Notice that negotiating an IRS settlement such as installment agreement or an offer in compromise will not stop the IRS from filing the lien. As a matter of fact, in many instances, the minute your CPA or tax attorney negotiates an installment agreement (in the same conference) they will inform the IRS representative of the tax lien filing.

Five Tax Relief Options for a Tax Lien

There are five possible situations where the issue of tax lien relief comes into play. Tax relief of a tax lien comes in the form of a “release” of tax lien.

Certificate of Non Attachment

If you receive a tax lien notice by mistake because of similarity of names, you can have a tax resolution when you file for non attachment of the lien to your property. You must submit the application for certificate of non attachment to the IRS in writing providing the necessary details required as to why the lien should not be attached to you (see publication 4235) and that you are not party to the tax problem.

Release of Erroneous Tax Lien

If you still have a lien against a property for which the tax debt has been paid prior to the filing of the lien, then the IRS must release the lien. Also if the lien has been filed for a debt that was no longer eligible for collection because of the lapse of the statute, then the IRS must release that lien.

Certificate of Release of Paid or Unenforceable Tax Lien

If the lien was previously filed and you have completely paid the lien or because the statute has lapsed on the tax lien that was on your property, then that lien is unenforceable and the IRS must release the lien (within 30 days). Likewise, if offered to post a bond to pay the taxes and the IRS accepts the bond, then the IRS must release the lien.

Tax Lien Subordination

If there is a tax lien on your property and you want to sell the property to your best interest and the IRS best interest, then you can solve this tax problem by applying to the IRS to release the lien until the property is sold and the IRS can then collect what is left after paying off the mortgage to the extent of the tax debt.

Tax Lien Discharge

You can find tax help if your CPA, your tax attorney or enrolled agent applies to discharge the lien with the IRS if there is no benefit for the IRS to gain by having this lien on your property. If you are upside down and have no equity in the property the IRS will completely discharge the lien and let you sell the property.