IRS Tax Liens–how they work

What is an IRS Tax Lien and what is the IRS seeking to do when it files a lien?

The IRS files federal tax liens in the County Courthouses where it believes the taxpayer may own real estate or other property.  Essentially, the taxpayer cannot sell real estate in that County unless the current tax debt is paid either prior to the closing or otherwise accounted for at closing (there is a process where the IRS may agree to permit a property to be sold whereby it releases the property from the lien and it will collect all of the net proceeds from the closing).

If the taxpayer owns real estate in a county where a federal tax lien has not been filed, then he can sell the real estate without paying off the lien balance at the closing.  So, the Collections Division of the IRS will usually be diligent in trying to ascertain where its taxpayers own real estate.

Does the filing of a federal tax lien necessarily mean that the IRS will continue to pursue aggressive enforcement such as levies and garnishments?   No, not necessarily.  In fact, the IRS will often file a protective lien against a compliant taxpayer who is merely seeking to enter into a payment plan (Installment Agreement).   Please note that usually this is when there is a balance of more than $25,000.  Moreover, I frequently see cases in which the IRS has filed a tax lien against a taxpayer, but then becomes quiet for a period of months without engaging in further enforced collections.   Nevertheless, it’s not a good sign if a lien has been filed, and taxpayers with outstanding balances should not become complacent.

IRS Tax Liens Can Be Confusing

The confusing part is that the “balance due” shown on your Notice of Federal Tax Lien is not the amount that you currently owe.  Let’s say if a lien for $20,000 was filed on January 1, 2017, and then the taxpayer was involved in an Offer in Compromise for 2 and a half years, and was subsequently rejected for his OIC.   His balance would have continued to accrue penalty and interest during the 2.5 years and he would then owe approximately $30,000.   One of the biggest rules with IRS tax debts is to remember to account for the accrual of penalty and interest.

What does an IRS Tax Lien Attach To?

It’s important to know that an IRS Tax Lien does not prime a legitimate mortgage on real estate.  In other words, let’s say that John Doe owns a property worth $175,000.  He has a first mortgage with Bank of America with a balance of $105,000 and a second mortgage with Citizens Bank with a balance of $25,000.  The IRS then files a lien against John for $100,000.   The IRS lien does not come before the two mortgages, and John can indeed sell his property as long as he goes through the proper (and rigorous) path of getting his proposed sale approved.   Let’s say he gets an offer to sell the property for $175,000, then at the closing, both the Bank of America and Citizens Bank mortgages would be paid in full, and the IRS would be paid the balance.  John would not be permitted to take any of the funds at closing because all of the net proceeds would go to the IRS.   Nevertheless, this could be a good strategy for John, because his IRS tax debt would be paid down, and he could enter into a more affordable payment plan at that point.

IRS Tax Liens Are (Usually) Not Forever

That’s right, generally speaking, the IRS will assert a tax lien for 10 years, and unless, the 10-year period is suspended, then the lien will be released after the 10 year mark.  In fact, you can look at a Notice of Federal Tax Lien, and find the exact date that the IRS made its tax assessment against the taxpayer.   The date of assessment might often be about a month or two after the taxpayer filed his tax return.  You can then add 10 years to the date of the tax assessment, and that will give you the approximate date on which the IRS will release its tax lien.  In fact, this date is known as the Collections Statute Expiration Date.  But wait, there is a catch.  If you have ever filed a bankruptcy case, or submitted an Offer in Compromise, or filed a request for a Collections Due Process hearing, then that date could be extended, because the IRS must suspend collections when you pursue any of those 3 strategies.

Let’s say that you do however cause the IRS to suspend collections.   If so, then the IRS may refile its lien for the remaining duration of the 10 year collections period.

Finally, it does occasionally happen that in the case of substantial tax debts, the IRS will assign cases to the U.S. Department of Justice in order for its attorneys to file federal lawsuits against taxpayers.  In that type of case, the federal lawsuit would have to be filed prior to the Collections Statute Expiration Date, but the judgment from the lawsuit would outlive the CSED.   I do not personally see these types of cases very often, but they do happen from time to time, but generally only in the case of a very large tax debt.


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