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advocacy community education
This article, the first in a series of three,
provides a brief overview of the Internal
Revenue Service (IRS) lien process.
A taxpayer will become involved with
lien issues after an assessment has
been made. The lien secures payment
for any tax debt. Being aware of the
timeline and rights in the lien process is
helpful because the IRS lien has a
broad effect on property rights. While
an IRS lien is in place, the proceeds
from the sales of property (to the extent
of the tax debt secured by the lien)
must be paid to the IRS. As the lien can
stay in place for as long as 10 years, a
taxpayer will want to know how to chal-
lenge the filing of the lien. The rules for
challenging liens may also provide a
door into challenging the underlying
assessment, meaning that knowing the
laws and rules for the IRS lien may
help taxpayers lower their tax bill.
All lien issues begin with a tax assess-
ment. The IRS must officially determine
that taxpayers have a tax liability before
any lien can arise. The IRS will send a
notice of assessment in the form of a
letter to the taxpayers. If 10 days pass
after receiving this notice and the tax-
payers have not paid the assessment,
then the lien arises. The IRS lien is
effective as of the date of assessment,
and is known as "the silent lien"
because it arises automatically, without
requiring a separate notice.
The lien attaches to "all property and
rights to property, whether real or per-
sonal," belonging to the taxpayer. Once
the lien arises, it attaches automatically
to all property the taxpayers owned on
the date of assessment and any after-
acquired property. Defining what counts
as "property" or "rights in property" is
therefore very important, and it can be
tricky. Taxpayers may find themselves
in a situation that raises questions
about whether they actually own some-
thing to which a lien could attach.
State law determines whether taxpay-
ers own "property" or "rights in proper-
ty." If the state defines a certain interest
as "property" or "rights in property,"
then federal law determines whether
the IRS lien will attach (even if under
state law such property is otherwise
exempt from liens). For example, in
Drye et al v. United States, the taxpay-
er owed the IRS $325,000 and the IRS
filed its lien. During this time, the tax-
payer's mother passed away, leaving
him property worth approximately
$233,000. The taxpayer filed a written
disclaimer of all interests in the estate.
Under Arkansas law, if an individual
files such a disclaimer, then the effect
is as if the disclaimant predeceased
the decedent. In this case, that meant
state law treated the taxpayer as having
died before his mother, with the result
that any property in her estate skipped
him and went straight to his heirs. The
taxpayer hoped that by doing so the tax
lien would not attach to the inherited
property, since under state law he never
technically owned it. Unfortunately for
the taxpayer, the United States
Supreme Court determined that the tax-
payer's right to his mother's assets was
a property right to which the federal tax
lien attached. The taxpayer did not suc-
ceed with his attempt to disclaim his
interest in the estate.
The lien is valid against everyone
except "purchasers, holders of a secu-
rity interest, mechanic's lienors, or
judgment lien creditors" unless notice
of the lien has been filed (discussed
below). This means that if the taxpayer
transfers any property to any type of
person not in this list (for example, a
family member), the transferee will
receive the property subject to the lien.
If the lien is to be valid against the list-
ed persons as well, the IRS must file
notice of the lien. State law determines
where a notice of federal tax lien is
filed. In Connecticut, an IRS lien
against any real property is filed in the
town where the property is located.
This is true whether the property is
owned by an individual or a business
Part I: Lien Basics
By Laura E. Pisarello, Esq.
Tax Liens