Does an IRS Lien Trump Your Interest in a Debtor's Property?

Often times a debtor will try to minimize their apparent collectability by telling a creditor that, “…the IRS has a lien on everything.” While, if true, this gives you an indication that there may be larger issues in the debtor’s financial life than just the debt owed to you, what does this really mean for the collectability of your debt? Are you still going to be able to get to the debtor’s real and personal property to satisfy your claim, or does the federal government trump every one else?

The IRS’s lien is created by IRC § 6321 and is a very broad lien; it generally encompasses all of the taxpayer’s¹  property or rights to property as security for a tax liability.  The lien is automatically created when a taxpayer fails to pay the first tax bill due.²   The lien is valid until the tax is paid or the enforceability lapses.³   Generally, after assessment, the Service has ten years to collect the tax liability.⁴  There are some circumstances which may extend or suspend the ten-year collection period and allow for refiling.⁵

However, the relevant consideration here is the priority of this lien as to other interests in the property.  In order to establish the IRS’s lien priority as to other creditors, the IRS must file a Notice of Filing of Tax Lien (NFTL).⁶   State law will determine where and how a NFTL needs to be filed, indexed or recorded to be valid as to third parties.⁷   For example, in Ohio, ORC 317.09 requires the NFTL to be filed in the office of the county recorder for the county in which the property attached is located.  Therefore, if the debtor resides in Cuyahoga County but keeps a boat in Ottawa County, a NFTL recorded in the Cuyahoga County Recorder’s Office does not attach to the boat in Ottawa County, as far as a third party is concerned.

Assuming the IRS has a properly recorded NFTL under your state’s requirements, what happens to your interest in the property?

In general for most types of liens, including judgment liens, mechanic’s liens and security interests, the lien which is first in time will prevail provided the lien was properly perfected prior to the filing of the NFTL.⁸   Certain rules will apply in each circumstance.  For example, with regard to a judgment lien, in Ohio and many other states, a judgment lien does not attach to personal property unless it is seized by a levy.⁹  As such, the seizure of the personal property through a valid levy must be affected prior to the filing of the NFTL in order to have priority.  

There are certain liens that will have “superiority” over a previously properly filed NFTL.  These include an attorney’s lien for the reasonable compensation earned by an attorney in obtaining a judgment or settlement for the taxpayer, with certain limitations¹⁰, a mechanic’s lien for work performed on residential real property up to $7,160¹¹, and a person in possession of a piece of personal property under an artisan’s lien as created by local law.¹²  Be aware however, that the local law governs the creation and priority of these artisan liens.  For example, in Ohio, an artisan’s lien is created by O.R.C 1333.41.  The lien covers all repair and materials provided to an item of personal property at the request of the owner; however, it is subject to any prior recorded security interest. Therefore, if the NFTL is properly recorded, it will be afforded priority just as other properly recorded liens would.  Superiority may also be created in property taxes, utility charges and special assessments against real property if local and state laws give these charges priority over previously recorded security interests and mortgages.¹³ 

Also notable, the federal tax lien attaches to all after acquired property of the debtor.  For example, if an NFTL is properly filed, and the debtor acquires real property, the lien attaches to this new real property and relates back to the date of the filing of the original NFTL.  This has consequences for the first mortgage holder who must be sure no NFTL is in effect prior to the purchase or obtain a subordination by the federal government in order to position its mortgage first in priority.  Also, state exemptions as to the attachment of certain property by a judgment creditor, do not apply to the IRS lien.¹⁴  Therefore the IRS lien can attach certain property other creditors bound by state law cannot reach.  

In all, although an IRS tax lien is very broad, and can attach to more property than a general judgment lien, it does not always defeat an otherwise valid lien.  The timing of the perfection of each lien and state laws governing priority are critical to determining who has priority. 

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