When Does the IRS File a Tax Lien?

What is an IRS Tax Lien | Notice of Federal Tax Lien | TaxFortress.comIf you or your business owe money to the IRS, the specter of a tax lien might be keeping you up at night.  Will the IRS file a tax lien?  When will they do it?  How will this affect me?  These are all legitimate concerns.

What is a Federal Tax Lien?

Let me begin with an explanation as to what exactly a federal tax lien is before going any further.  In a nutshell, a federal tax lien is a claim against property, including current and future rights to property. It represents a tax or tax related debt of an individual or business.  Note that a statutory federal tax lien comes to existence by operation of law once a tax liability is assessed.  Aside from always paying your taxes on time, there isn’t really much that can be done to avoid a statutory tax lien.  However, a statutory tax lien, sometimes referred to as a “silent lien,” is not a public record, and, for the most part, ought not to be a major cause for concern (though owing the IRS is definitely a serious cause for concern).  Generally speaking, a statutory tax lien won’t hurt your credit and won’t impair your ability to borrow or buy and sell assets.

Notice of Federal Tax Lien (NFTL)

Things get a lot more serious when the IRS issues a Notice of Federal Tax Lien (NFTL).  An NFTL is a public notification that is filed with a designated state and local jurisdiction for the purpose of informing the world of the existence of the statutory lien securing the tax debt.  The purpose of a federal tax lien is to establish the Government’s right of priority against creditors.  The types of people who want to know about the existence of an NFTL include lenders, purchasers, and holders of a security interest such as a mechanic’s lien, UCC lien, mortgage or judgment lien.

With most liens the typical rule of thumb is “first in time, first in right,” meaning that a secured interest that is created and perfected prior in time to another secured interest will take priority over the subsequent secured interest.  However, federal tax liens are often times referred to as “super liens” because they can sometimes avoid this rule.  For more information on this aspect of federal tax liens please see my other article that discusses the IRS 45 day rule.

How Does a Federal Tax Lien Affect Me or My Business?

Now that we have a basic understanding as to what a federal tax lien is, the next logical question probably is why should I care about a tax lien?  An individual or business should be concerned about tax liens because by alerting creditors, they then become aware of the statutory lien and tax liability through the Notice of Federal Tax Lien filing and then those creditors must compete with the lien.  The mere filing of the federal tax lien may affect the creditworthiness of the person or business against whom the lien was filed.  Furthermore, it may also impact the ability to get a loan, or a new credit card, or the financing needed to buy a house or a car, or even to sign a lease, just to mention a few things.  All of the determinants of a tax lien make it important that taxpayers resolve outstanding tax liabilities as quickly as possible before a Notice of Federal Tax Lien filing becomes necessary.

The good news is that the IRS cannot just file a Notice of Federal Tax Lien without any warning or notice.  Several things must first occur before an NFTL gets filed.  An assessment must be made, notice and demand for payment must be made, and the taxpayer must neglect or refuse to pay the assessment.  In order for the IRS to file a Notice of Federal Tax Lien, the IRS is required to first make reasonable efforts to contact the taxpayer.

So what constitutes reasonable efforts?  The IRS has determined that issuing a statutory assessment notice and balance due notice satisfies this requirement because these notices provide 10 or more days for the taxpayer to pay the liability thereby allowing them to avoid additional penalty and interest charges.  The IRS is only required to mail these notices to the last known address that they have on file.  Due to this provision, it is advisable to always keep the IRS up to date with your current address.  Of course, as with most IRS rules, there are some exceptions to these notice requirements but since they are not very common, this article will not be addressing the limited exceptions.

It is worth noting that the IRS generally will not issue an NFTL for liabilities of less than $10,000.  However, there is no guarantee that they won’t issue an NFTL for smaller tax debts.

Some additional good news is that the IRS is not always obligated to file a tax lien.  There are pre-filing considerations that the IRS must first consider.  Internal Revenue Code Section 6320 requires the IRS to balance the need for efficient collection of the tax with legitimate concerns of the taxpayer.  This is done in order to ensure that the IRS’s actions are no more intrusive than necessary.  Some of these considerations include but are not limited to a taxpayer’s current and previous tax compliance history, a taxpayer’s qualification for a determination exception, protection of the government’s interest (including exigent circumstances where the filing of an NFTL is necessary to protect those interests), and a determination of whether a Notice of Federal Tax Lien filing will hamper collection.

Some determination exceptions include securing certain payment agreements such as guaranteed/streamlined installment agreements or in-business trust fund express agreements that resolve the outstanding tax liability within pre-established timeframes, which tend to be relatively short.  Resolution options such as these are discussed in separate Fortress Financial Services articles and so I encourage you to check them out.  However, just like with most IRS provisions, there are exceptions to these guidelines that allow the IRS to file a tax lien despite the taxpayer qualifying for a resolution alternative that does not require a lien to be filed.  These exceptions typically involve a determination by the IRS that it is in their best interest to file a tax lien due to the taxpayer in question being a repeat offender (e.g. defaulting prior resolution agreements and/or taxpayers who have a track record of continually accruing liability).

Even if the all of the above mentioned pre-filing criteria have been satisfied, do not give up hope as all is not lost.  The IRS is still able to choose to not file a Notice of Federal Tax Lien provided that they are able to support why not filing one would be appropriate.  These types of situations vary on a case by case basis so having a qualified tax attorney on your side can be very beneficial in persuading the IRS that a tax lien would not be appropriate.

Circumstances When the IRS Does Not Need to Fike a Tax Lien

There are some limited circumstances when the IRS does not need to support their decision to not file a fax lien.  Some of these circumstances include:

  1. When the aggregate unpaid balance of assessments is less than $10,000 or the balance to be reflected on the tax lien is less than $2,500;
  2. When there is no reason to believe a lien filing will be required in the future. One example of this would be a pending full abatement of the tax liability;
  3. The taxpayer is a defunct corporation or LLC (where the LLC is liable) whose assets have been previously liquidated;
  4. The taxpayer is deceased and there are no known assets in the estate;
  5. The taxpayer is a corporate entity or LLC (where the LLC is liable) that has gone through a liquidating bankruptcy;
  6. When a non-paying officer has been assessed the Trust Fund Recovery Penalty and an adjustment is pending because the assessment has been paid by another officer;
  7. There is an indication that the liability has been satisfied or that credits are available to satisfy the liability;
  8. The taxpayer is in bankruptcy and the tax lien relates to liabilities incurred before the taxpayer filed for bankruptcy;
  9. There is genuine doubt as to the validity of the liability.

Bottom line, a Notice of Federal Tax Lien can be very detrimental to any individual or business and so it is very important to act quickly when one becomes aware of an outstanding federal tax liability so steps can be made to address and ultimately resolve the liability before the IRS determines that a Notice of Federal Tax Lien may be necessary.  If you are concerned about a Notice of Federal Tax Lien, I suggest you contact a tax resolution professional or call Fortress Financial Services, Inc.

About David M. Feldman, Esq.