The Federal Tax Lien - All You Need to Know

Understanding how tax liens work is not an easy task. However, all taxpayers are supposed to understand their tax liens. To begin with, it is important to note that tax liens last for the period the IRS has to collect from a taxpayer, which is usually 10 years. The IRS is supposed to release the lien after the expiry of the 10 year statute of limitation.

To have this done on a bigger degree, the IRS usually makes the lien self-releasing. This implies that the lien is usually automatically released when the 10 years are over.

The tax alien document contains the information "Notice of Federal Tax Lien" at the top. The centre of the lien contains six columns which are recognized with letters (a) through (f). Each of the columns contains definite information like (a) the type of tax you owe, (b) the tax years, (c) the last four digits of your Social Security number, (d) the date the IRS put your balance due on its books, (e) the last day the IRS can re-file the lien if it needs to, and (f) balance due. It should be noted that the balance due is not what a taxpayer owes presently and does not show the accrued interest, fines or any other payments that might have been made.

The heart of the lien is column (d) and column (e). The day when the collection statute kicked off is indicated on column (d). To get the date when the IRS collection statute is expected to expire, you add 10 years to the date indicated on column (d) from the alien. Column (e) indicates the date when the collection statute runs out and the release date, which is usually 30 days after the expiry of the IRS collection statute. It is indicated on the face of the lien that the lien itself operates as a certificate of release after expiry of the collection statute.

However, the time the IRS has to collect can be extended by some actions like submission of an Offer of Compromise, filing bankruptcy as well as the submission of a collection due process appeal. The IRS can extend the life of the lien by refilling it to go with the longer collection period when the collection statute is longer than 10 years. It is at this point that the 30 days come into play. In case the IRS re-files the lien within 30 days of the collection statute expiration date, the lien remains intact and maintains its superiority against all of taxpayer's other creditors.

Taking an example of Joe, who owns a house worth $200,000, has a mortgage amounting to $100,000. The IRS has a tax lien filed that attaches to all the equity in Joe's house. Joe filed an Offer in Compromise with the IRS that it rejected, and it took the taxman 12 months to complete the offer investigation. The offer Joe gave granted the IRS an additional 12 months to collect against him and the equity in his house.

Although the IRS lien self-releases after the expiry of the original 10 year collection statute, it takes them another 12 months to pursue Joe's house. If the taxman re-files the lien before the 30 days of expiry, the priority of the tax lien against Joe's house is maintained and remains in place for another 12 months Joe owes the IRS. Failure by the IRS to re-file in time results in the priority of the lien against the tax being lost, although Joe will still owe the IRS for another 12 months as their claim is unsecured.

This means that Joe could still sell his house of the lien is not re-filed on time and the lien would not be paid at closing. Also, Joe can put a second mortgage on the house equity as the lien is self-released and wasn't re-filed to maintain its priority from the extended collection statute.

The IRS can still re-file its lien after 30 days, but they risk their priority for any intervening event. Using Joe's example, in case the IRS re-filed the lien after 30 days and before the lien was re-filed, Joe took another mortgage. This would imply that the tax lien would now come third after the two mortgages because if the IRS re-files the lien late, the lien is pushed back. It may sound complicated but the tax pros are in a better position to help a taxpayer understand the liens better.
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Rob L Daniel and partners of Limon Whitaker & Morgan, for years have helped businesses and individuals Nationwide, with their delinquent IRS & State tax problems. The firm is based in Los Angeles, California USA. http://www.limonwhitaker.com Tel: 888.321.6188
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