Understanding Federal tax liens: How they work, when they expire and why they can be refiled
The Internal Revenue Code does not make it easy to understand how Federal tax liens work. Hopefully, that is what I am here for.
The starting point to understanding your tax lien is to know that it lasts for the amount of time the IRS has to collect from you – 10 years. After the 10 year statute of limitations on collections expires, the IRS is required to release the lien. To accomplish this on a wide scale, the IRS inserts language into the lien that makes it “self-releasing.” That means it is automatically released when the 10 years is up.
This “self-releasing” aspect of a tax lien is right on the face of the lien. Here is what a Federal tax lien says:
“IMPORTANT RELEASE INFORMATION: For each assessment listed below, unless the lien is refiled by the date given in column(e), this notice shall, on the day following such date, operate as a certificate of release as defined in IRC 6325(a).”
Grab your tax lien (I know it may be painful to look at). The top of the document will say “Notice of Federal Tax Lien.” As an overview, in the center of the lien are six columns, identified with letters (a) through (f). Each column lists (a) the type of tax you owe, (b) the tax years, (c) the last four digits of your social security number, (d) the date the IRS put your balance due on its books, (e) the last day the IRS can refile the lien if it needs to, and (f) a balance due.
Note the balance due is not what you owe now; it is not current and does not reflect accrued interest, penalties or any payments you may have made.
Tax liens may contain a foreign language, but you can learn a lot if you know how to read them. Let’s focus on the fourth column of the lien (column (d) ), and the fifth column (column (e). They are the heart of the lien.
Column (d) provides the date the IRS made its assessment against you; in other words, the day the collection statute began. Take the date in column (d) and add 10 years. From the lien itself, we now have the date the IRS collection statute should expire.
As stated on the face of the lien, the lien itself operates as a certificate of release after the collection statute expires. Column (e) gives you that date, which is 30 days after the IRS collection statute expired. Hopefully, for you,the lien ends there, after 10 years.
But sometimes there’s a catch: You may have done something that extended the time the IRS has to collect. Did you submit an offer in compromise? File bankruptcy? Submit a collection due process appeal? All of these extend the time the IRS has to collect.
In cases where the collection statute is longer than 10 years, the IRS can extend the life of the lien by refiling it to match the longer collection period. This is where the 30 days comes into play.
If the IRS refiles the lien within 30 days of the collection statute expiration date, the lien remains in place and maintains its priority against all of your other creditors.
Example of lien refiling: Let’s say you own a house, and it is worth $200,000. You have a mortgage, and you owe $100,000 on it. The IRS has a tax lien filed, which attaches to all of the equity in your house. You filed an offer in compromise with the IRS, which was rejected (don’t believe what you see on TV; most are). It took the IRS 12 months to complete the offer investigation. Your offer gave the IRS 12 more months to collect against you and the equity in your house.
The tension is that the IRS lien self-releases when the original 10 year collection statute expires, but they have 12 more months to pursue your house. What happens?
If the IRS timely refiles the lien before the 30 days expires, the tax lien maintains its priority against your house and will remain in place for the additional 12 months you owe the IRS.
If the IRS does not refile the lien timely, the lien loses its priority against your house, although you still owe the IRS for an additional 12 months. Their claim is unsecured. The point: You could sell your house if the lien is not timely refiled, and the lien would not be paid at closing. Or you could put a second mortgage on the house equity as the lien self-released and was not refiled to maintain its priority from the extended collection statute.
One more thing: The IRS can still refile its lien late – after 30 days – but their priority is at risk for any intervening event. Using the example above, presume the IRS was late and refiled the lien after 30 days. Before the lien was refiled, you took out a second mortgage. The tax lien would now be third in line, after your first and second mortgages. If the IRS is late on the refiling of the lien, the lien goes to the back of the class.