This is the second part of a three-part series of articles that explains what you need to know about the federal tax lien if you have unpaid tax debts. If you missed the first installment of this series, you can read it here.
The IRS’s federal tax lien can have a devastating impact on your personal finances. This installment focuses on the very important topic of what property is subject to the IRS’s federal tax lien.
The Federal Tax Lien
As we explained in the prior installment, the federal tax lien is basically a “you owe us” note that attaches to your property.
Once filed in the public records, it puts others on notice that the IRS has some right to your property. This lets the other party know that they have a higher degree of risk if they choose to transact business with the person subject to the lien.
Attaches to All Property Owned
The law provides that the IRS’s federal tax lien attaches to all property and rights to property that you own. The term “all property” really does mean all property. It means everything you own.
The IRS’s federal tax lien attaches to property that you own at the time the lien arises. The IRS’s federal tax lien also attaches to all property that you subsequently acquire.
So if you owe unpaid taxes for the tax year 2015, the tax lien would attach in 2016 when the tax liability was due to be paid. The lien would continue to attach to property that you acquire in 2016, 2017, etc. until the tax liability is paid, the collections period has expired, or it was discharged in bankruptcy.
Property Rights Per State Law
While federal law provides for the IRS’s federal tax lien, the lien itself only attaches to property rights that you own as defined by state law. So one must consider state law to determine what rights you have in the property to determine whether that property is subject to the IRS’s federal tax lien.
A few examples may help. A federal tax lien generally attaches to property you hold in a revocable trust because state law generally provides that you, as trustee, have the ability to revoke and recoup the property.
Compare this to property that you hold in an irrevocable trust. A federal tax lien generally does not attach to an interest in an irrevocable trust because state law provides that you do not have this power.
There are nuances that apply here. For example, the IRS’s federal tax lien may not attach to the property held by an irrevocable trust, but it may attach to a right to fixed payments that you receive from the irrevocable trust.
Purchase Mortgage Exception
There is also a special rule for purchase money mortgages.
A purchase money mortgage is a mortgage or loan used to purchase the property. The IRS’s federal tax lien attaches to property subject to this type of mortgage; however, the IRS’s lien generally does not have priority over the mortgage.
So the IRS’s federal tax lien would only attach to the equity you have in the property, or amount in excess of the purchase money mortgage.
Click here to read the next installment of this series, which covers selling real estate subject to the IRS lien.
You must act quickly to address unpaid taxes to avoid these consequences. This is particularly true if you have received the IRS notice of a federal tax lien. We can help. We help taxpayers with tax liens daily. If you have an IRS tax lien, we would like to hear from you. Please contact us today to schedule an appointment to see how we can help.