Federal Tax Liens: What You Need to Know

Understanding the priority and implications of a federal tax lien is essential for managing your financial affairs effectively.

What is a Federal Tax Lien?

Federal tax liens are legal claims against property – including real estate, personal property, and financial assets – that are imposed when taxpayers fail to pay their tax debt. Federal tax liens are intended to ensure that the government has the right to a delinquent taxpayer’s property over other creditors.

How Does a Federal Tax Lien Arise?

• • Assessment: The IRS assesses the tax liability and sends the taxpayer a bill.
  • Demand for Payment: The IRS sends a Notice and Demand for Payment.
  • Failure to Pay: If the taxpayer does not pay the bill within 10 days, a lien is created.

Why is Priority Important?

The priority of a federal tax lien is crucial because it determines the order in which creditors will be paid from the proceeds of a sale of taxpayer property. Here’s how it works:

• • First in Time, First in Right
    • The general rule is that the first lien to be filed has priority over others. A federal tax lien’s priority is based on the date the lien is filed.
  • Special Rules for Federal Tax Liens
    • Superiority: Federal tax liens usually take priority over most other liens, including those from other creditors, with a few exceptions.
    • Subordination: In some cases, the IRS may agree to subordinate its lien, making it secondary to another lien, in order to facilitate refinancing or the sale of property.
  • Specific Exceptions
    • Local Property Taxes: Liens for local property taxes and special assessments generally take priority over federal tax liens.
    • Certain Security Interests: Some security interests perfected before the IRS files its Notice of Federal Tax Lien may have priority.
  • Judgment Liens: Liens from a court judgment might also have priority if they are filed before the IRS lien.

What is the Impact on Property Transactions?

A federal tax lien can significantly impact a taxpayer’s ability to sell or refinance their property:

• • Selling Property: When selling property, the lien must be satisfied (paid off) from the sale proceeds.
  • Refinancing: Refinancing can be challenging, as most lenders will not approve a loan unless the lien is subordinated or paid off.
  • Collection Due Process (CDP) Rights: Taxpayers have the right to request a hearing to appeal the lien.

How Can I Resolve a Federal Tax Lien?

• • Payment in Full: Paying the tax debt in full releases the lien within 30 days.
  • Offer in Compromise: Negotiating a settlement of the tax debt for less than the taxpayer owes can result in a release of the tax lien.
  • Lien Withdrawal: The IRS may withdraw the lien in certain cases, as if the lien was never filed.

If you have property that is subject to a federal tax lien, it is advisable to consult with a tax or legal professional to explore your options and mitigate the impact on your property and your finances.

This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.