Does a Refiled Notice of Lien Give the IRS More Time to Collect?

THE REFILING OF
A NOTICE OF FEDERAL TAX LIEN

Does a Refiled Notice of Lien Give the IRS More Time to Collect?

There is a great deal of confusion associated with the IRS’s Notice of Federal Tax Lien, Form 668. First, the notice creates confusion for citizens because people often confuse a tax lien with a tax levy. The two are decidedly quite different. A lien does not alter the title of property. That is, it does not convey (or seize) one’s property, thus making it the property of the federal government. Only a levy does that. The Notice of Federal Tax Lien (NFTL) is merely the process the IRS uses to put the public on notice that the IRS claims an interest in one’s property by virtue of an unpaid tax liability.

A notice of levy, on the other hand, divests a person of his property. The IRS takes possession of the asset and applies its value against the tax owed. For example, a bank levy or wage levy physically intercepts the account balance or income stream and applies the proceeds to the tax.

Second, and to the point of this discussion, the NFTL contains language that suggests the IRS may refile its lien. This causes confusion because people often believe that as long as the IRS refiles its lien before the date shown on the NFTL as the “Last Day for Refiling,” the liability continues to be collectible, perhaps indefinitely. Let’s drill into this more deeply.

The Nature of a Tax Lien

A federal tax lien attaches to all property and rights to property owned by the citizen at the time the lien arises, and all property acquired by the citizen after the lien arises. The lien arises and is enforceable after: a) the tax is assessed, b) notice and demand for payment is issued according to law, and c) the tax is not paid within the time required by the demand for payment. These are all that is required in order for a lien to be considered perfected against the person who owes the tax. See: IRC § 6321.

The lien created by this process is technically known as a “statutory” lien because it is created by operation of law. But because there is no public notice associated with any of the three steps mentioned, the statutory lien is commonly referred to as a “secret” lien. That is, there’s no way for a third party to have knowledge that a particular person owes unpaid taxes. Thus, the “secret” lien is not valid or effective against purchasers of property, holders of security interests, mechanic’s lien holders, and judgment creditors. See: IRC § 6323(a).

In order for a lien to be effective against any of the above creditors, that is, to give the IRS priority over the claims of such creditors, the IRS must file Form 668, NFTL. See: IRC § 6323(a). Once that notice is filed according to procedures set forth in section 6323 and in accordance with state law, the general rule for determining the priority of competing creditors’ claims against a delinquent citizen’s property is determined by the age-old rule, “first in time is first in line.” See: United States v. City of New Britain, 347 U.S. 81 (1954).

Simply stated, whichever creditor is first to file its lien, mortgage or other security agreement with county officials per state law is first in line to attach the debtor’s property in the event of non-payment. The best example of this is a mortgage company that has a perfected mortgage against one’s property. Assuming that mortgage was perfected before an IRS lien was filed, the mortgage company’s claim has priority over the IRS’s claim.

Subscribers of Pilla Talks Taxes get the rest of the article including:

• How Long is a Lien Effective?
• Why it’s Critical to Understand the Collection Statute of Limitations
• The CSED and a Refiled Lien
• What’s the Deal with a Refiled Lien?
• When Must the IRS Refile the NFTL?
• Is Refiling a Lien is Automatic?

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