Federal Tax Liens: Their Validity and Power

By:  Coleman Jackson, Attorney, Certified Public Accountant
November 09, 2017

Federal Tax Liens:  Their Validity and Power

26 United States Code § 6321. Lien for taxes-   If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) 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.  (Aug.16, 1954, ch. 736, 68A Stat. 779.)

A federal tax liens objective or goal is to pressure the taxpayer to pay the delinquent taxes.  The lien is used by the United States government to get payment of outstanding tax debts.  Everyone wants to be timely paid what they think someone owes them; the federal government is no different in this regards.  The tax lien encumbrance can be placed on real property, such as, real estate, mineral interests and improvements to real estate.  The tax lien encumbrance can also be placed on personal property, such as, equipment, intellectual property (patents, trademarks and copyrights), cars and trucks, business inventories, desks and chairs.  This blog discusses federal tax liens:  their validity, power or effectiveness.

Tax liens exist whether they are ever filed by the IRS or not.  We will explain.  Unless specified by other federal law (the existence of a federal tax lien is a matter of federal law and not state law), a federal tax lien arises under 26 U.S.C. § 6321 at the time the tax assessment is made and continues until the tax liability is satisfied or becomes unenforceable by reason of lapse of time.  Typically, the IRS has ten years from the date the tax is assessed (when the tax debt is put on the IRS books and records) to collect the tax debt.  There are certain things, such as, the taxpayer filing bankruptcy that suspends the ten year statute of limitations.   The proper filing of the tax lien is a matter of state law because state law governs rights and responsibilities pertaining to property interest.  The procedures and practices of how to perfect a lien (file a lien); in general is governed by each of the states property laws.  That is because there is no nationwide property law system.  In fact in the State of Texas, property law is very local.  What I mean is that proper filing of liens in Texas, whether they are mortgage liens, equipment liens or federal tax liens, must be filed in the county property records where the property is situs.  In other words, Texas does not have a statewide property register.  Each county of Texas maintains County Property Records, such as, deeds, mineral interest, and so forth.  So what does all this mean?  It simply mean that although a lien may exist, 26 U.S. C. § 6323 says that it is not valid against any purchaser, holder of a security interest, mechanic’s lienor, or judgment creditor until notice of the federal tax lien has been properly filed by the Secretary of the U.S. Treasury.  In other words, the IRS must comply with state property laws to perfect a federal tax lien.  Again, in Texas, that means the federal tax lien must be filed in the county where the property is located.  Moreover, the affected third party must have actual knowledge of the lien.

Proving that a third party purchaser had actual knowledge of the federal tax lien at the time they entered into a particular transaction can be extremely elusive.  Actual knowledge of the lien notice must be held in the following particulars:

Securities—Code  § 6321 liens are not valid against a purchaser of such security who at the time of purchase did not have actual knowledge of the existence of the federal tax lien and did not have knowledge of the existence of the lien which came into existence when the tax was assessed.

Motor vehicles—Code § 6321 liens are not valid against a purchaser of a motor vehicle if at the time of the purchase the purchaser did not have actual knowledge or knowledge of the existence of the federal tax lien and the purchaser has not given possession of the motor vehicle back to the seller or its agent(s).

Personal  property purchased at retail—Code § 6321 liens are not valid against a purchaser of tangible personal property purchased at retail in the ordinary course of the seller’s trade or business, unless at the time of purchase, the purchaser intends to or knows the purchase will hinder, evade, or defeat the collection of any tax under 26 United States Code.  That is the Internal Revenue Code.

Personal property purchased in casual sale—Code § 6321 liens are not valid against a purchaser of household goods, personal effects, or other tangible personal property purchased not for resale in a casual sale for less than $1,000 if the purchaser has no actual knowledge of the federal tax lien.  Serial sales from the same seller could be problematic and get the casual sale purchaser in trouble; especially if the combination of the serial purchases exceeds $1,000.

Personal property subject to possessory lien—Code § 6321 liens are not valid against a holder of tangible personal property subject to a lien under local law securing the reasonable price of the repair or improvement of the property if the lien holder is and has been continuously in possession of the property from the time the local lien law arose.

Real property tax and special assessment liens—Code § 6321 liens are not valid against a holder of a lien upon property if such lien is entitled under local law to priority over security interests in such property which are prior in time, and the lien secures payment of a general tax application levied by any taxing authority based upon the value of the property a special assessment imposed directly upon such property by any tax authority if such assessment is imposed to defray cost of any public improvement or charges for utilities or public services furnished to such property by the United States, any State or political subdivision or instrumentality thereof.

Residential property subject to a mechanic’s lien for certain repairs and improvements – Code § 6321 liens are not valid against mechanic’s lien holders of a lien on real property for repairs or improvements of a personal residence of not more than four dwelling units and occupied by the owner of such residence if the contract price with the owner is $5,000 or less.

Attorneys’ lien—Code § 6321 liens are not valid with respect to an attorney’s lien with respect to a judgment or other amount in settlement of a claim or of a cause of action, when the attorney under local law, holds a lien on a contract enforceable against the judgment or amount to the extent of reasonable compensation for legal services in obtaining the judgment or settlement, excepting a judgment on a claim against the United States is subject to offset of the taxpayer’s debt.

Certain insurance contracts—Code § 6321 is not valid against the organization which is the insurer under the life insurance, endowment, or annuity contract at any time before such insurer has actual knowledge of the federal tax lien.

Deposit-secured loans—Code § 6321 is not valid against an institution described in IRC §§ 581 and 591 to the extent the loan made by the institution without actual knowledge of the federal tax lien if such loan is secured by such account.

In addition, certain commercial transactions financing agreements and real property construction or improvement agreements are not impacted by federal tax liens under Code § 6321 because;  even if filed in the property records, federal tax liens are not valid under certain circumstances.

To summarize, federal tax liens exist as of the moment the IRS books the tax debt.  Federal tax liens need to be filed pursuant to local property laws.  Even if filed in accordance with local property laws, federal tax liens are not valid unless folks have actual knowledge of the liens in the various factual situations we’ve discussed in this blog.  In those instances, federal tax liens validity and power are definitely meager as against third-parties without actual knowledge of the federal tax lien.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432

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