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advocacy community education
Connecticut CPA article, "IRS Tax
Liens: The Basics," I introduced the
basic timeline and rules governing the
IRS tax lien. Recall that a federal tax
lien arises when the IRS assesses a
liability, demands payment, and the
taxpayer fails to pay within 10 days.
The federal tax lien attaches to all
property and rights to property the tax-
payer holds on the date of assessment
or subsequently acquires. The tax lien
is referred to as a "silent lien" because
there is no filing required for the lien to
be effective against the taxpayer.
However, the IRS will often file a Notice
of Federal Tax Lien (NFTL) to ensure
priority over creditors. The priorities at
each stage of the lien process are
described below.
Before the NFTL
The silent lien may attach to all proper-
ty and rights to property of the taxpayer,
but without the filing of the NFTL, the
lien does not have priority over most
creditors or purchasers. The IRS
specifically provides that the silent lien
is not valid against "any purchaser,
holder of a security interest, mechanic's
lienor, or judgment lien creditor" until
the NFTL is filed. So, against whom is
the silent lien valid?
The only group that will take property
from the taxpayer subject to the silent
lien are transferees who receive tax-
payers' property for inadequate consid-
eration. For example, if Acme
Corporation has a tax liability for which
no NFTL has been filed and gifts prop-
erty to ABC Corporation, ABC will take
the property subject to the IRS lien.
By contrast, if ABC were a "purchaser"
rather than the recipient of a gift, it
would take the property free of the
unfiled silent lien. A "purchaser" as
defined in the Code is a person or enti-
ty that acquires an interest (other than
a lien or security interest in property)
for adequate and full consideration in
money or money's worth. In addition,
the interest must be valid under local
law as against subsequent purchasers
without actual notice.
So if ABC purchases Acme's property
for full market value before the NFTL is
filed, ABC will take the property free of
the IRS tax lien. (It should be noted,
however, that a purchaser with knowl-
edge of the silent lien will take the
property subject to the lien. In practice,
such knowledge can rarely be proven
and therefore, for all intents and pur-
poses, such purchaser will receive the
property free of the lien.)
Holders of a security interest, mechan-
ic's lienors, and judgment lien creditors
will also have priority over the IRS if
their interest is perfected before the
NFTL. They will have priority in property
the taxpayer already holds or has a right
to at the filing of the NFTL. These cred-
itors are described in more detail below.
Holders of a "security interest" are
those who acquired an interest by a
written contract securing payment, per-
formance, or indemnification from the
taxpayer. The holder's priority extends
only to money or money's worth actual-
ly provided to the taxpayer before the
NFTL. Even if the agreement provides
Suppose your clients run a business and the IRS has assessed a tax liability that the
clients cannot pay. To keep the business alive, your clients must pay their usual creditors;
however, it has been more than 10 days since the assessment of the liability, so the
IRS lien has already attached to the business's property and rights to property.
Who has priority against your clients' assets?
(continued on next page)
Part 2: Priority of
the IRS Tax Lien
By Laura E. Pisarello, Esq.
Tax Liens