A federal tax lien arises by operation of law per Internal Revenue Code section 6321 when: 1. a tax assessment is complete; 2. a notice and demand for payment of the assessment is made; and 3. the taxpayer has neglected or refused to pay. The lien attaches to all property, rights to property, and after acquired property. Initially this lien that arises by operation of law is called a “silent lien” or “secret lien” because the lien is not yet recorded to make the lien publicly known and put third party creditors on notice of the lien.
While a secret lien may exist, the IRS must record notice in order for a tax lien to have a practical effect against other creditors and assist the IRS in collection visa-vis those creditors Tax liens are recorded by the IRS when tax debts go unpaid. A lien is “a charge or encumbrance that one person has on the property of another as security for a debt or obligation.” IRM 18.104.22.168(1). A lien establishes the government’s priority over subsequent creditors based on the principle of “first in time, first in right” by securing the debt interests of the government in property in relation to other creditors, which in turn helps the IRS collect delinquent taxes by preventing the sale of assets unless the IRS is paid the amount secured by the lien.
Liens are recorded, or filed, by the IRS for each tax period and type of tax. It is not uncommon for the IRS to record multiple Notices of Federal Tax Lien in each county where the IRS believes the debtor taxpayer owns property or resides. The IRS may also file a Notice of Federal Tax Lien with the Secretary of State’s office to secure personal property. A tax lien will appear on a credit report once recorded and can remain on a credit report even after the tax debt is fully satisfied.
A lien determination is required to be made by the IRS when the aggregate unpaid balance of assessment is more than $10,000, or a proposed installment agreement does not meet the criteria for guaranteed, streamlined, or in-business trust fund express criteria. The IRS will record a Notice of Federal Tax Lien in the vast majority of cases when the balance of assessment totals more than $50,000.00.
The IRS does provide an opportunity to appeal a determination to recording of a tax lien through an administrative appeal, although the likelihood of successfully challenging a lien on a valid tax debt is generally very low. If the taxpayer wants to avoid a tax lien, the options might be limited depending on the amount of the tax debt and ability of the taxpayer to pay the debt.
Once filed, a federal tax lien will generally remain effective as long as the underlying tax debt is owing. The lien releases when the tax debt is fully satisfied (including payment of interest and penalties), or when the debt expires because of the statute of limitations. Generally, federal tax debt will expire 10 years after the date of assessment.
There are a few ways to deal with a tax lien which include release, partial discharge, subordination and withdrawal. The simplest and most obvious way to resolve tax liens is to pay the tax owing in which the case the IRS will release the lien. This is usually easier said than done when funds are short.
Obtaining a partial discharge or subordination can be tricky, but may be necessary in order to sell or refinance the property. The IRS requires that approval of a subordination or partial release put them in a better position to collect the tax owing than if they did not grant the request. In short, the IRS is generally going to approve a subordination or partial discharge only if they are going to get paid.