General Federal Tax Liens: When They Arise, What Happens, And How They Affect The Taxpayer

A lien is a charge or claim against a property for the payment of a debt. A creditor’s lien does not, by itself, transfer property ownership to the creditor. There must be a levy or seizure first to force a sale.

What Is A Tax Lien ?

When it comes to the government’s claim or charge on a taxpayer’s property to pay the tax due, it is called a tax lien. The tax lien does not, by itself, deprive the delinquent taxpayer of his property. The government only obtains possession or custody of the property when the IRS seizes it or serves a notice of levy. A notice of levy only transfers constructive possession of the property to the IRS. The title of the taxpayer is not divested until the property is sold. 

When Does A Tax Lien Exist? 

A federal tax lien exists when the taxpayer refuses or neglects to pay the assessed tax after the IRS sends the notice and demand. Its existence does not rely on filing a notice in the public records; however, such notice protects the IRS concerning the competing creditors – purchasers, holders of a security interest, mechanics lienholders, and judgment creditors.   

Effect of Tax Lien on Persons Dealing with Delinquent Taxpayers 

Once the IRS files notice of the lien, lenders, purchasers and transferees deal with a delinquent taxpayer at their peril. Once they acquire property from the taxpayer, it is acquired subject to the tax lien, and any claim they have will be paid out of the taxpayer’s property in a position subordinate to the tax lien. In one case, the Court held that federal tax lien has priority over the simultaneous state and private liens (United States v. Kimbell Foods, Inc., 440 US 715 (1979). In another case, it was held that perfected federal tax lien has priority over simultaneous judgment lien creditor (McDermott v. United States, 507 US 447 (1993). 

As a result of the superiority of tax lien over other liens, prospective creditors and transferees will check whether a tax lien is on file in the appropriate office, and they will not deal with the taxpayer if a lien is on file. Consequently, the delinquent taxpayer can be deprived of an opportunity to acquire the means to pay their outstanding tax.   

When can the IRS Seize the Property? 

The IRS cannot outrightly seize a taxpayer’s property after a general lien has been attached to it. Besides collection due process review, there are a few limitations. The IRS needs to wait for thirty days after giving the taxpayer notice of levy before it may levy upon, seize, and sell all properties and property rights of the taxpayer without judicial intervention.   

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