Understanding the Notice of Federal Tax Lien
A federal tax lien arises automatically when the taxpayer fails to pay in full the taxes that have been assessed against the taxpayer within ten days after the IRS sends the first notice of taxes owed and demand for payment. This “secret” lien automatically arises when a person “liable to pay any tax” fails to pay said tax after receiving a demand to do so. It is called a secret lien because only the taxpayer and the IRS know of its existence. The lien does not become public until the IRS files a Notice of Federal Tax Lien.
A federal tax lien is a legal claim by the United States to the taxpayer’s real and personal property, including property that the taxpayer acquires after the lien arises. That lien arises “in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.”
26 U.S.C. § 6321.
What is the effect of a Notice of Federal Tax Lien?
The filing of a Notice of Federal Tax Lien (“NFTL”) in the public records publicly notifies creditors that the IRS has a claim against all the taxpayer’s property, including property acquired after the filing of the NFTL. The filing of a NFTL has appeared on a taxpayer’s credit report and may harm the taxpayer’s credit rating. Once a lien arises, the IRS generally will not release the lien until the tax, penalty, interest, and recording fees are paid in full or until the IRS may no longer legally collect the tax after the collection statute expiration date.
The NFTL has many negative affects upon taxpayers – sometimes catastrophic affects. For example, taxpayers may find it difficult, if not nearly impossible, to obtain a bank loan or home equity line of credit once the NFTL is filed. Similarly, taxpayers may experience difficulty obtaining credit cards or other personal credit. Taxpayers should not be surprised if the NFTL affects their ability to change jobs. Businesses with loan agreements should contact their lawyers to determine if the filing of a NFTL violates any contractual covenant – such a covenant violation could trigger a bank loan “default” causing the whole loan to become immediately due and payable.
Can the IRS’ tax lien be withdrawn?
The IRS will withdraw a NFTL if the notice was filed while a bankruptcy automatic stay was in effect. The IRS may withdraw a NFTL if the IRS determines: (a) the taxpayer paid the agreed amount of the Offer in Compromise; (b) the taxpayer entered into an installment agreement to satisfy the liability unless the installment agreement provides otherwise; (c) the NFTL was not filed according to IRS procedures; (d) withdrawal will allow the taxpayer to pay the tax liability quicker; or (e) withdrawal is in both the taxpayer’s best interest, as determined by the National Taxpayer Advocate, and in the best interest of the government.
Complicated? You bet.
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