What is a tax lien ?
A federal tax lien is a public filing of the government’s legal claim against your property when you owe tax. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets and establish the priority of the government’s claim as against other secured creditors.
While the government is precluded from using an administrative levy while an installment agreement is pending, the government can still file a tax lien and is not precluded from seeking judicial enforcement of their tax lien. State Auto Property and Casualty Insurance Company, DC Miss., 2017-2 USTC Par. 50,435. 8/13/18
Notice of Federal Tax Lien (NFTL)
The IRS can file a NFTL at the Office of the Recorder of Deeds for the county where you reside. The lien places third parties on notice and establishes the IRS’ “security interest” in “all property or interest in property of taxpayer” and the priority of that security interest.
Electronic filing of lien
The proposed regulations provide that Form 668, Notice of Federal Tax Lien, may be filed in paper or electronic form (including transmission by fax and e-mail).
Avoidance of lien filing
The IRS Fresh Start program (historical from 2013) increased to $10,000 the amount that taxpayers can owe before the IRS will generally file a Notice of Federal Tax Lien. The IRS may still file a lien notice on amounts less than $10,000.
A lien is not required to be filed if the individuals assessed balance due is less than $25,000 and the individual enters into an installment agreement, or for assessed balances of $25,001 to $50,000 with mandatory use of direct debit or payroll deduction agreement.
Property affected by lien
When you owe taxes a “general tax lien” automatically applies to “all property or interest in property of taxpayer”. The lien is a “general” lien because it applies to all taxpayer’s property and not just specific named property. Compare this to a deed of trust on your house which contains a “legal description” of the real property and only encumbers the property described and not any other property. “All interest in property” includes property you have a beneficial interest in even if you do not have legal title, e.g., a residence you are purchasing on a contract for deed.
Compared to seizure
While filing the tax lien is not an action resulting in immediate seizure of your property, it impedes your ability to deal with your property. E.g., if you want to refinance or sell your residence, a title search would reveal the tax lien, and unless dealt with, the IRS’ interest is superior to the bank’s new mortgage or results in the buyer taking the house subject to the tax liability.
Generally the refinance or sale cannot be completed unless the IRS “discharges” the particular property being disposed of from lien (not a release of the lien itself so the lien continues to apply to taxpayer’s other property). Typically the IRS will discharge the residence from the lien in exchange for the equity the seller would otherwise receive on sale, but the lien is not released until the tax is paid in full and continues to affect the taxpayer’s other property. The IRS may also subordinate its lien to a bank mortgage or other security interest if it can be shown to be in the IRS’ interest, e.g., it is more likely the IRS will be paid with a decrease in monthly payments due to a better interest rate freeing more money to pay the IRS.
What is a levy on (seizure of) property ?
The IRS can take more immediate collection activity by “seizing” your property, e.g., by serving a Notice of Levy on your bank account or other property. The bank account would then be frozen up to the amount of the levy for 21 days, during which time you can contest the levy (“bounced”). If an appeal of the levy is not successful, or after the 21 day period has passed without appeal, the funds in the account (up to the amount of tax due) are paid over to the IRS.
Property subject to levy
Except for a taxpayer’s salary or wages, a levy does not apply to after-acquired property; but only extends to property possessed and obligations existing at the time of the levy. A levy on salary or wages “shall be continuous from the date such levy is first made until such levy is released under § 6343.” After the Service has levied on a taxpayer’s property, it can foreclose on the property, sell the property, and apply the proceeds against the tax liability. The Internal Revenue Service Restructuring and Reform Act of 1998 (“IRSRRA”) amended § 6335 by preventing the IRS from determining just a minimum price for the property. § 6335(e)(1)(A) now requires the Service to determine a minimum price below which the property may not be sold. 3/11/09
All property on which the Service has a tax lien is subject to levy by the Service. IRC § 6334 sets out the following as exempt property:
- Wearing apparel and school books;
- Fuel, provisions, furniture, and personal effects in the household, livestock, and poultry of the taxpayer that does not exceed $6,250 in value (indexed for inflation to $8,230 for 2009);
- Books and tools necessary for the trade, business, or profession of the taxpayer that does not exceed $3,125 in value (indexed for inflation to $4,120 for 2009);
- Unemployment benefits;
- Undelivered mail;
- Certain annuity and pension payments;
- Worker’s compensation;
- Judgments for support of minor children;
- Minimum exemption for salary, wages, and other income;
- Certain service-connected disability payments;
- Certain public assistance payments;
- Assistance under Job Training Partnership Act;
- Residences in small deficiency cases (where the levy does not exceed $5,000), and the taxpayer’s principal residence in the absence of certain judicial approval or jeopardy.
The exempt amount of wages, salary, or other income is an amount equal to the sum of the standard deduction and the aggregate amount of the deductions for personal exemptions.
The Government can foreclose its tax lien for taxes assessed against ex-husband against a nonliable spouse’s property received in divorce 2/9/11
Where the lien attached to the property before divorce when it was jointly held, the lien was not extinguished when the wife received the property in dissolution of marriage. Jones, DC Calif., 2011-1 USTC ¶50,167.
Automatic release of lien 4/23/08
Most NFTLs now contain a certificate of release that is automatically effective on the date stated in the NFTL (date the required refiling period ends). The lien self-releases and is extinguished in all jurisdictions. Failure to timely refile the NFTL in any jurisdiction where it was originally filed extinguishes the lien, and if filed in more than one jurisdiction, certificates of revocation, as well as new NFTLs, must be filed in all the jurisdictions for the lien to be reinstated.
Withdrawal of filed tax lien
The IRS may now withdraw a filed Notice of Federal Tax Lien when a taxpayer meets certain requirements and pays off their tax debt. A “withdrawal” removes the public Notice of Federal Tax Lien and assures that the IRS is not competing with other creditors for your property; however, you are still liable for the amount due. Taxpayers must request this in writing using Form 12277, Application for Withdrawal. See the IRS video Lien Notice Withdrawal. If a taxpayer defaults on the Direct Debit Installment Agreement, the IRS may file a new Notice of Federal Tax Lien and resume collection actions.
Some taxpayers may qualify to have their lien notice withdrawn if they are paying their tax debt through a Direct Debit installment agreement. Taxpayers also need to request this in writing by using Form 12277. If a taxpayer defaults on the Direct Debit Installment Agreement, the IRS may file a new Notice of Federal Tax Lien and resume collection actions. The IRS has a video explaining the process. 4/17/13
Two additional Withdrawal options resulted from the Commissioner’s 2011 Fresh Start initiative:
- (1) Your tax liability has been satisfied and your lien has been released; and also:
- (i) You are in compliance for the past three years in filing – all individual returns, business returns, and information returns; and
- (ii) You are current on your estimated tax payments and federal tax deposits, as applicable; and
- (2) If you have entered in or converted your regular installment agreement to a Direct Debit installment agreement:
- (i) You are a qualifying taxpayer (i.e. individuals, businesses with income tax liability only, and out of business entities with any type of tax debt);
- (ii) You owe $25,000 or less (If you owe more than $25,000, you may pay down the balance to $25,000 prior to requesting withdrawal of the Notice of Federal Tax Lien);
- (iii) Your Direct Debit Installment Agreement must full pay the amount you owe within 60 months or before the Collection Statute expires, whichever is earlier;
- (iv) You are in full compliance with other filing and payment requirements
You have made three consecutive direct debit payments; and
- (v) You can’t have defaulted on your current, or any previous, Direct Debit Installment agreement.
Discharge of liability for the tax does NOT extinguish the tax lien.
An IRS tax lien may be subject to “lien stripping” (liens reduced to the property value) in Chapter 11. The Supreme Court had held that a tax lien on real property could not be stripped down in Chapter 7 liquidation case. The Bankruptcy Court in Johnson v. IRS, Bktcy Ct PA, 101 AFTR 2d 2008-1798, held the IRS lien against Chapter 11 debtor’s residence was null and void pursuant to 11 USC 506 because other priority liens pre-dating the IRS lien collectively exceeded residence’s fair market value (FMV), so there was no equity in residence to which IRS lien could attach. The Bankruptcy Court held that in the Chapter 11 reorganization context, lien stripping is “ingrained” and crucial to achieving the Bankruptcy Code’s rehabilitation and fresh start goals, and there was nothing inherent in an IRS lien allowing it to be treated differently from any other lien so as to be exempt from lien stripping. 5/8/08
Chapter 7 debtors brought adversary proceeding seeking determination that obligations to Internal Revenue Service (IRS) were dischargeable and an order requiring IRS to release prepetition tax liens. The United States Bankruptcy Court for the Western District of Washington granted debtors’ motion for summary judgment. The Government appealed, and The Bankruptcy Appellate Panel, 95 B.R. 148, reversed. The 9th Circuit Court of Appeals, held that the IRS was not required to release tax liens when underlying debt had been discharged in bankruptcy. In re Isom, 901 F.2d 744 (9th Cir. 1990). “The liability for the amount assessed remains legally enforceable even where the underlying tax debt is discharged in the bankruptcy proceeding. A discharge in bankruptcy prevents the I.R.S. from taking any action to collect the debt as a personal liability of the debtor. The debtors concede, however, that their property remains liable for a debt secured by a valid lien, including a Footnotes tax lien. See Long v. Bullard, 117 U.S. 617, 6 S.Ct. 917, 29 L.Ed. 1004 (1886); see also Southtrust Bank v. Thomas (In re Thomas), 883 F.2d 991, 997 (11th Cir.1989) (discussing Congressional intent to codify the rule of Long v. Bullard ); H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 361, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5862; S.Rep. No. 95-989, 95th Cong., 2d Sess. 76, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5862 (indicating Congressional intent that the rule of Long v. Bullard survive). We hold that 26 U.S.C. §6325(a)(1) does not require the I.R.S. to release valid tax liens when the underlying tax debt is discharged in bankruptcy.” 3/10/18
IRS proposed regulations update validity & priority of liens against certain persons – superpriority status 4/23/08
A casual sale of personal property qualifies for priority over a filed tax lien, if among other things, the sale is for less than $1,000 as adjusted for inflation ($1,320 for 2008).
A small mechanic’s lien for the repair or improvement of an owner-occupied residence has priority if the contract price is less than $5,000, adjusted for inflation ($6,600 for 2008).
Code Sec. 6334(a)(2) exempts $6,250 in household goods from levy (2008 inflation-adjusted limit $7,900).
A bank without knowledge of a tax lien to a depositor receives superpriority for loans to the extent the loan is secured by the depositor’s account. Before the IRS Restructuring and Reform Act of 1998, loans had to be evidenced by a passbook and the financial institution had to continuously retain the passbook from the time the loan was made. Reg. § 301.6323(b)-1(j).
If you can access the funds the IRS can seize them. Many retirement plans do not permit withdrawals while still employed, and only allowing access at termination of employment, retirement, death, or disability. If you can withdraw the money the IRS can also. The Internal Revenue Manual provides retirement accounts are not to be levied: (1) if conduct leading to the liability was not flagrant (evasion, fraud or making contributions to the account while unpaid taxes were becoming due); or (2) you depend on the money in the retirement account, or will in the near future. 3/16/09
Social Security Automated levy 5/10/09
Internal Revenue Code (“IRC”) § 6331(h) authorizes the IRS to continuously take, month after month, an automatic 15% of a taxpayer’s social security benefits. The IRS matches its records of delinquent taxes to those of the government’s Financial Management Service, which indicate social security entitlement, then the IRS sends a notice is sent to the taxpayer that the 15% levy will commence on his or her social security, and after the levy commences, the Financial Management Service sends a notice of confirmation to the taxpayer.
The 15% automatic levy provision is not a limit, but only a supplement to the IRC § 6331(a) manual levy power, under which the IRS can continuously take all (100%) of wages, salary or other income including social security. Manual levy requires the assignment of an IRS Revenue Officer, while the automatic levy is a paperless transmission.
Exemptions on a manual levy
Taxpayers have the right to claim an exemption against the levy under IRC § 6334(a)(9). The IRS publishes a table of the amounts that can be claimed as exempt. A single taxpayer getting a monthly social security benefit can currently claim $779.17 as exempt from a manual levy.
A garnishment is an attachment of wages. The IRS can generally garnish you down to minimum wage level.
When the IRS levies a bank account, you have 21 days, mandated by Internal Revenue Code 6332(c), to work with the IRS to have the money in your account released from the levy before your bank sends it to the IRS. If e.g., the account belongs to your minor child and only has your name on it due to their age, you may be able to get the levy released, but generally the IRS does not release bank levies.
An IRS levy on your bank account is not a continuing action attaching additional amounts you deposit after the bank receives the levy, and is a one time event that only captures funds in the account at the time the levy is received by the bank. However, the IRS can send additional levies. See Internal Revenue Manual 18.104.22.168. 4/9/09
Other Collection Actions
Other collection options available to the IRS include garnishment of wages and seizure of tax refunds or amounts due from third parties. The IRS garnishment can generally reduce the amount of your wages that you receive to the minimum wage, and a garnishment of self-employed persons can be 100%.
Casual sale of personal property 10/19/08
For calendar year 2008, a federal tax lien is not valid against:
- certain purchasers under § 6323(b)(4) who purchased personal property in a casual sale for less than $1,320, or
- a mechanic’s lienor under § 6323(b)(7) that repaired or improved certain residential property if the contract price with the owner is not more than $6,600.
IRS lien information
- Federal Tax Lien (IRS web site)
- How to contact the IRS to inquire about a lien (IRS web site) Contact the Centralized Lien Unit by calling the toll free telephone number (1-800-913-6050)
- IRS Form 911 – Request for Taxpayer Advocate Service Assistance
- Appealing the Filing of a Lien (IRS web site)
- Applying For a Discharge of a Federal Tax Lien (this site)
- Applying For a Discharge of a Federal Tax Lien (IRS web site)
- Making the IRS lien secondary (subordination) (this site)
- Making the IRS lien secondary (subordination) (IRS web site)
- How or when a lien can be withdrawn (IRS web site)
- Understanding a Lien (IRS web site, including removing a lien)
The TAS YouTube channel is available at www.youtube.com/TASNTA 4/15/11
- Federal Payment Levy Program
- Installment Agreements
- The Power of the Notice of Federal Tax Lien
- Liens – IRS Collection Alternatives
IRS Announces Major Changes Made to Lien Process IR-2011-20, Feb. 24, 2011, changes include:
- Significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens.
- Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.
- Withdrawing liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement.
- Creating easier access to Installment Agreements for more struggling small businesses.