Consumer Protection Lawyers

Law Office of Arthur L. Weiss, P.C.

Most people fear federal tax liens and with good reason.  They last a long time, they affect everything the taxpayer owns and they cannot be trumped by state law property exemptions   In order to understand what the NFTL does, it is important first to understand what a lien is and how it works.  This article will cover the basics of the tax lien, how it arises, what the IRS needs to do before it can impose or file a lien and some of the steps the taxpayer can take when she receives a NFTL.

 

The tax lien is permitted under the Internal Revenue Code (IRC) in Section 6321 - “If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount...shall be a lien in favor of the United States upon all property and rights to property, whether real or personal belonging to such person.” 

 

The lien is actually created after three things have occurred (1) the IRS determines that the taxpayer owes them money and assesses that amount,  (2) within 60 days of the assessment the IRS demands that the taxpayer pay the amount owed and (3) taxpayer either neglects or refuses to pay the amount owed within ten days.  Step one is satisfied by the formal process of assessment within the IRS.  Once the IRS computes an amount owed by a taxpayer, it will after several friendly attempts to solve the matter, formally assess a deficiency.  Once the amount of the deficiency along with penalties and interest is formally assessed, the next step is to demand payment.  This comes in the form of a letter to the taxpayer detailing the amount owed, the method by which interest and penalties was computed and an information sheet outlining the appeal rights of the taxpayer.  This extremely important letter is called a statutory notice of deficiency or a 90 day letter and satisfies step two.  The final step is in the hands of the taxpayer who has several options at this point.  The taxpayer can simply pay the amount owed and no lien will ever arise.  The taxpayer can ignore the letter and wait till the IRS begins collection efforts in earnest, or the taxpayer can take defensive measures against the tax liability.  Which route the taxpayer should take depends upon the answer to a simple question - does the taxpayer really owe the money.  In most cases, the taxpayer has no defense to the assessment.  They owe the money, they admit they owe the money, but they haven’t got the money.  In that case, where the taxpayer does not dispute the validity of the debt, he should try to make arrangements with the IRS to either compromise the debt (very tough to do) or enter into an installment agreement (very easy to do). 

 

Getting back to the NFTL - Once the three elements above have been satisfied, a lien automatically arises.  This gives the IRS a certain collection priority that will date back to the date of the assessment.  So if the assessment is made on July 1^st but the NFTL is not filed until September 30^th, the IRS will have collection priority over creditors whose rights arose after July 1^st.   The NFTL will be filed in the local county offices and will affect all the property belonging to the taxpayer.  The IRS does not file a NFTL in all cases where the lien automatically arises.  However if the amount is large or if the IRS feels its position is in some danger, it will file the lien to insure that its position is secured. 

 

Receiving a Notice of Federal Tax Lien is a serious matter.  The filing will adversely affect your credit, your ability to sell property and may affect your ability to get a job or your insurance rates. The lien is valid until either the tax liability is fully paid or the statute of limitations on collections expires - in about ten years!   At that time, the lien is “self-releasing” which means that it automatically releases on the date that the IRS’ ability to collect disappears.  That date appears right on the notice and is easy to spot.  However, other than the automatic release in ten years, it is unlikely, not impossible but unlikely, that the IRS will remove the lien until it is fully paid off.  In many cases the taxpayer will have to take out a second mortgage to pay off the lien.  There are provisions for the IRS to work with the lender to permit the loan to go forward, get the IRS paid off and the lien released.  Through coordination with the IRS, the loan is approved and executed, the IRS is paid and a lien release is issued.  In these cases the lender will send the money directly to the IRS to insure that the liability is satisfied and the lien is then released in a timely manner. 

 

In the absence of a payoff, whether through a second mortgage or borrowing money from relatives, the taxpayer should reconcile themselves to living the next ten years with the lien on file down at the county offices.   Picture it this way - the lien freezes all the assets of the taxpayer in place.  They can’t be moved, sold, burned, thrown away or given away (there are technical exceptions to this that are beyond the scope of this article).  Once the stuff is frozen in place, the IRS will have an easier time with the next step in the collection process - levy or seizure.  

 

 

 

     

 

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Notice of Filing a tax lien