Tax lien
Encyclopedia
A tax lien is a lien
imposed by law upon a property to secure the payment of taxes. A tax lien may be imposed for delinquent tax
es owed on real property
or personal property
, or as a result of failure to pay income taxes or other taxes.
, gift tax
, or estate tax
.
section 6321 provides:
Internal Revenue Code section 6322 provides:
The term "assessment" refers to the statutory assessment made by the Internal Revenue Service
(IRS) under (that is, the formal recording of the tax in the official books and records at the office of the Secretary of the U.S. Department of the Treasury
). Generally, the "person liable to pay any tax" described in section 6321 must pay the tax within ten days of the written notice and demand. If the taxpayer fails to pay the tax within the ten day period, the tax lien arises automatically (i.e., by operation of law), and is effective retroactively to (i.e., arises at) the date of the assessment, even though the ten day period necessarily expires after the assessment date.
Under the doctrine of Glass City Bank v. United States, the tax lien applies not only to property and rights to property owned by the taxpayer at the time of the assessment, but also to after-acquired property
(i.e., to any property owned by the taxpayer during the life of the lien).
The statute of limitations under which a federal tax lien may become "unenforceable by reason of lapse of time" is found at . For taxes assessed on or after November 6, 1990, the lien generally becomes unenforceable ten years after the date of assessment. For taxes assessed on or before November 5, 1990, a prior version of section 6502 provides for a limitations period of six years after the date of assessment. Various exceptions may extend the time periods.
The general rule is that where two or more creditors have competing liens against the same property, the creditor whose lien was perfected at the earlier time takes priority over the creditor whose lien was perfected at a later time (there are exceptions to this rule). Thus, if the government (which is treated as a "creditor" with respect to unpaid taxes) properly files a Notice of Federal Tax Lien (NFTL) before another creditor can perfect its own lien, the tax lien will often take priority over the other lien.
To "perfect" the tax lien (to create a priority right) against persons other than the taxpayer (such as competing creditors), the government generally must file the NFTL in the records of the county or state where the property is located, with the rules varying from state to state. At the time the notice is filed, public notice is deemed to have been given to the third parties (especially the taxpayer's other creditors, etc.) that the Internal Revenue Service has a claim against all property owned by the taxpayer as of the assessment date (which is generally prior to the date the NFTL is filed), and to all property acquired by the taxpayer after the assessment date (as noted above, the lien attaches to all of a taxpayer's property such as homes, land and vehicles and to all of a taxpayer's rights to property such as promissory notes or accounts receivable). Although the federal tax lien is effective against the taxpayer on the assessment date, the priority right against third party creditors arises at a later time: the date the NFTL is filed. The form and content of the notice of federal tax lien is governed only by federal law, regardless of any requirements of state or local law.
Federal law also allows a state—if the state legislature so elects by statute—to enjoy a higher priority than the federal tax lien with respect to certain state tax liens on property where the related tax is based on the value of that property. For example, the lien based on the annual real estate property tax in Texas takes priority over the federal tax lien, even where an NFTL for the federal lien was recorded prior to the time the Texas tax lien arose, and even though no notice of the Texas tax lien is required to be filed or recorded at all.
and seizure by any means. The general rule is that no court permission is required for the IRS to execute a section 6331 levy.
In other words, the federal tax lien is the government's statutory right that encumbers property to secure the ultimate payment of a tax. The notice of levy is an IRS notice that the IRS intends to seize property in the near future. The levy is the actual act of seizure of the property.
In general, a Notice of Intent to Levy must be issued by the IRS at least thirty days prior to the actual levy. Thus, while a Notice of Federal Tax Lien generally is issued after the tax lien arises, a Notice of Intent to Levy (sometimes misleadingly called simply a "notice of levy") generally must be issued before the actual levy is made.
Also, while the federal tax lien applies to all property and rights to property of the taxpayer, the power to levy is subject to certain restrictions. That is, certain property covered by the lien may be exempt from an administrative levy (property covered by the lien that is exempt from administrative levy may, however, be taken by the IRS if the IRS obtains a court judgment).
A detailed discussion of the administrative levy, and the related Notice, is beyond the scope of this article.
In connection with federal taxes in the United States, the term "levy" also has a separate, more general sense of "imposed." That is, when a tax law is enacted by the Congress, the tax is said to be "imposed" or "levied."
does not affect a tax lien, which remains effective until the offer is accepted and the offered amount is fully paid. Once the compromised amount is paid, the taxpayer should request removal of the lien.
State-by-State Tax Lien Statutes
Lien
In law, a lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation...
imposed by law upon a property to secure the payment of taxes. A tax lien may be imposed for delinquent tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
es owed on real property
Real property
In English Common Law, real property, real estate, realty, or immovable property is any subset of land that has been legally defined and the improvements to it made by human efforts: any buildings, machinery, wells, dams, ponds, mines, canals, roads, various property rights, and so forth...
or personal property
Personal property
Personal property, roughly speaking, is private property that is moveable, as opposed to real property or real estate. In the common law systems personal property may also be called chattels or personalty. In the civil law systems personal property is often called movable property or movables - any...
, or as a result of failure to pay income taxes or other taxes.
Federal tax lien in the United States
In the United States, a federal tax lien may arise in connection with any kind of federal tax, including but not limited to income taxIncome tax in the United States
In the United States, a tax is imposed on income by the Federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and...
, gift tax
Gift tax
A gift tax is a tax imposed on the gratuitous transfer of ownership of property. The United States Internal Revenue Service says a gift is "Any transfer to an individual, either directly or indirectly, where full consideration is not received in return."When a taxable gift in the form of cash,...
, or estate tax
Inheritance tax
An inheritance tax or estate tax is a levy paid by a person who inherits money or property or a tax on the estate of a person who has died...
.
Federal tax lien basics
Internal Revenue CodeInternal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
section 6321 provides:
-
- Sec. 6321. LIEN FOR TAXES.
-
- If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belong to such person.
Internal Revenue Code section 6322 provides:
-
- Sec. 6322. PERIOD OF Tax Lien
-
- Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.
The term "assessment" refers to the statutory assessment made by the Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
(IRS) under (that is, the formal recording of the tax in the official books and records at the office of the Secretary of the U.S. Department of the Treasury
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
). Generally, the "person liable to pay any tax" described in section 6321 must pay the tax within ten days of the written notice and demand. If the taxpayer fails to pay the tax within the ten day period, the tax lien arises automatically (i.e., by operation of law), and is effective retroactively to (i.e., arises at) the date of the assessment, even though the ten day period necessarily expires after the assessment date.
Under the doctrine of Glass City Bank v. United States, the tax lien applies not only to property and rights to property owned by the taxpayer at the time of the assessment, but also to after-acquired property
After-acquired property
The After Acquired Title Doctrine is a legal doctrine under which, if a grantor conveys what is mistakenly believed to be good title to land that he or she did not own, and the grantor later acquires that title, it vests automatically in the grantee. A practical example is Husband and Wife own...
(i.e., to any property owned by the taxpayer during the life of the lien).
The statute of limitations under which a federal tax lien may become "unenforceable by reason of lapse of time" is found at . For taxes assessed on or after November 6, 1990, the lien generally becomes unenforceable ten years after the date of assessment. For taxes assessed on or before November 5, 1990, a prior version of section 6502 provides for a limitations period of six years after the date of assessment. Various exceptions may extend the time periods.
Perfection of federal tax liens against third parties (the Notice of Federal Tax Lien)
A federal tax lien arising by law as described above is valid against the taxpayer without any further action by the government.The general rule is that where two or more creditors have competing liens against the same property, the creditor whose lien was perfected at the earlier time takes priority over the creditor whose lien was perfected at a later time (there are exceptions to this rule). Thus, if the government (which is treated as a "creditor" with respect to unpaid taxes) properly files a Notice of Federal Tax Lien (NFTL) before another creditor can perfect its own lien, the tax lien will often take priority over the other lien.
To "perfect" the tax lien (to create a priority right) against persons other than the taxpayer (such as competing creditors), the government generally must file the NFTL in the records of the county or state where the property is located, with the rules varying from state to state. At the time the notice is filed, public notice is deemed to have been given to the third parties (especially the taxpayer's other creditors, etc.) that the Internal Revenue Service has a claim against all property owned by the taxpayer as of the assessment date (which is generally prior to the date the NFTL is filed), and to all property acquired by the taxpayer after the assessment date (as noted above, the lien attaches to all of a taxpayer's property such as homes, land and vehicles and to all of a taxpayer's rights to property such as promissory notes or accounts receivable). Although the federal tax lien is effective against the taxpayer on the assessment date, the priority right against third party creditors arises at a later time: the date the NFTL is filed. The form and content of the notice of federal tax lien is governed only by federal law, regardless of any requirements of state or local law.
Subsequent liens taking priority over previously filed federal tax liens
In certain cases, the lien of another creditor (or the interest of an owner) may take priority over a federal tax lien even if the NFTL was filed before the other creditor's lien was perfected (or before the owner's interest was acquired). Some examples include the liens of certain purchasers of securities, liens on certain motor vehicles, and the interest held by a retail purchaser of certain personal property.Federal law also allows a state—if the state legislature so elects by statute—to enjoy a higher priority than the federal tax lien with respect to certain state tax liens on property where the related tax is based on the value of that property. For example, the lien based on the annual real estate property tax in Texas takes priority over the federal tax lien, even where an NFTL for the federal lien was recorded prior to the time the Texas tax lien arose, and even though no notice of the Texas tax lien is required to be filed or recorded at all.
Certificate of release of federal tax lien
In order to have the record of a lien released a taxpayer must obtain a Certificate of Release of Federal Tax Lien. Generally, the IRS will not issue a certificate of release of lien until the tax has either been paid in full or the IRS no longer has a legal interest in collecting the tax. The IRS has standardized procedures for lien releases, discharges and subordination. In situations that qualify for the removal of a lien, the IRS will generally remove the lien within 30 days and the taxpayer may receive a copy of the Certificate of Release of Federal Tax Lien. The current form of the Notice of Federal Tax Lien utilized by the IRS contains a provision that provides that the NFTL is released by its own terms at the conclusion of the statute of limitations period described above provided that the NFTL has not been refiled by the date indicated on the form. The effect of this provision is that the NFTL operates as a Certificate of Release of Federal Tax Lien on the day after the date indicated in the form by its own terms.The difference between a federal tax lien and an administrative levy
The creation of a tax lien, and the subsequent issuance of a Notice of Federal Tax Lien, should not be confused with the issuance of a Notice of Intent to Levy under , or with the actual act of levy under . The term "levy" in this narrow technical sense denotes an administrative action by the Internal Revenue Service (i.e., without going to court) to seize property to satisfy a tax liability. The levy "includes the power of distraintDistraint
Distraint or distress is "the seizure of someone’s property in order to obtain payment of rent or other money owed", especially in common law countries...
and seizure by any means. The general rule is that no court permission is required for the IRS to execute a section 6331 levy.
In other words, the federal tax lien is the government's statutory right that encumbers property to secure the ultimate payment of a tax. The notice of levy is an IRS notice that the IRS intends to seize property in the near future. The levy is the actual act of seizure of the property.
In general, a Notice of Intent to Levy must be issued by the IRS at least thirty days prior to the actual levy. Thus, while a Notice of Federal Tax Lien generally is issued after the tax lien arises, a Notice of Intent to Levy (sometimes misleadingly called simply a "notice of levy") generally must be issued before the actual levy is made.
Also, while the federal tax lien applies to all property and rights to property of the taxpayer, the power to levy is subject to certain restrictions. That is, certain property covered by the lien may be exempt from an administrative levy (property covered by the lien that is exempt from administrative levy may, however, be taken by the IRS if the IRS obtains a court judgment).
A detailed discussion of the administrative levy, and the related Notice, is beyond the scope of this article.
In connection with federal taxes in the United States, the term "levy" also has a separate, more general sense of "imposed." That is, when a tax law is enacted by the Congress, the tax is said to be "imposed" or "levied."
The effect of an offer in compromise on the tax lien
A properly submitted offer in compromiseOffer in compromise
The Offer in Compromise program, in the United States, is an Internal Revenue Service program under which allows qualified individuals with an unpaid tax debt to negotiate a settled amount that is less than the total owed to clear the debt...
does not affect a tax lien, which remains effective until the offer is accepted and the offered amount is fully paid. Once the compromised amount is paid, the taxpayer should request removal of the lien.
External links
- IRS tax lien process
- IRS Appeals - Resolving Tax Disputes Official IRS Appeals Office Website
- Specific Laws and statutes regarding Liens
State-by-State Tax Lien Statutes