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Law Offices Of Michael D. Daniels LIENS AND LEVIES Under Code Section 6321, a general federal tax lien arises by operation of law if three requirements are met: (1) assessment, (2) demand for payment, and (3) non-payment by the taxpayer. After the IRS makes a demand for payment, the taxpayer has ten days to pay. If the taxpayer fails to pay, then under Code Section 6321 the lien becomes effective on the date of assessment and attaches to property (or property rights) that the taxpayer owns on the assessment date. A Code Section 6321 lien also attaches to any property the taxpayer acquires after the assessment date. Whether a taxpayer "owns" property or property rights is a matter of state law. Code Section 6331 permits the IRS, on 30 days' notice, to levy on, or seize, the taxpayer's property. The lien does not come into existence unless the taxpayer fails to pay after a demand for payment. The demand for payment is usually issued within 60 days of assessment, Reg. Section 301.6303-1, although the IRS's failure to make the demand within 60 days does not invalidate the demand. Reg. Section 301.6303-1. As a matter of longstanding case law, the demand requirement is not strictly enforced if the taxpayer waived or is deemed to have waived formal demand. For example, in Baltimore Pearl Hominy Co., 5 F.2d 553 (4th Cir. 1925), the court held that the demand requirement was satisfied even though the IRS had made no formal demand for payment. The company and the IRS had reached an agreement that Baltimore Pearl Hominy Co. would pay additional assessed tax of $35,000. The court reasoned that "the expression of this expectation and requirement that the Hominy Company should pay the amount agreed upon was in effect a demand and all that was requisite to make the tax a lien." Failure to comply with a payment demand occurs when the taxpayer refuses to pay when demand is made or, after receiving a written demand for payment, simply neglects to pay. (a) DURATION OF LIEN The duration of a federal tax lien is tied to the statute of limitations on collections. The limitations provisions require that the assessed tax be collected within ten years after the date of assessment. Effective for levies issued after November 10, 1988, collection under Code Section 6502(a) means not only the actual receipt of the taxpayer's funds, but also a levy or the institution of a court proceeding within the ten-year period. (Under prior law, only if the lien was reduced to judgment by a court proceeding did the IRS have the right to collect after the ten-year limitations period had run.) The period of time may be extended by a written agreement between the Secretary and the taxpayer (made prior to the expiration of the ten-year period), or, if there is a release of levy after the ten-year period, prior to the release. If a proceeding in court has been commenced, the period of time within which the tax may be collected by levy is extended and does not expire until the liability for the tax is satisfied or becomes unenforceable. Code Section 6502(a)(2). Effective for requests made after December 31, 1999, to extend the period of limitations, if there is an installment agreement between the Secretary and the taxpayer, the period of limitations within which the tax may be collected by levy or by a proceeding in court is extended to 90 days after the period of collection agreed upon in the installment agreement. If there is a release of levy after the ten-year period, there is an extension until the expiration of the period of collection agreed upon between the Secretary and the taxpayer prior to the release. Code Section 6502(a)(2). Collection is not permitted during the pendency of deficiency procedures because there has been no assessment. After the end of the 90-day period for filing a Tax Court petition, or after the Tax Court's decision has become final and an assessment is made, the collection period begins to run. Collection can be made either administratively by levy or judicially by the commencement of a proceeding in court. Code Section 6502(a). The ten-year period of limitations on collections is computed from the date of assessment. The date of assessment is the date the appropriate IRS official signs the assessment list. The assessment date itself is excluded from the computation. The date on which a complaint is filed in court commencing collection proceedings is included in making the computation. A levy on property or on rights to property is considered made on the date the Code Section 6335(a) notice of seizure is given. Reg. Section 301.6502-1(b). Ordinarily, the taxpayer should count the ten-year period as ten calendar years. But if the period is suspended, for example, by the submission of an offer in compromise, the ten-year period may best be counted by the number of elapsed days. This issue was not resolved until 1964, when the Seventh Circuit decided United States v. Tyrell, 329 F.2d 341 (7th Cir. 1964). For years, the IRS had used a "months-days" method, under which a year consisted of eleven calendar months and 30 days (if the limitations period was broken by a suspension). In Tyrell, the IRS relied on its longstanding administrative practice to resist the taxpayer's use of a counting method based on the actual elapsed days, so that ten years would be equal to nine calendar years and 365 days. These methods do not always produce different results, but they can. A simplified example, using an unbroken ten-year period, illustrates this point: If the assessment date is February 29, 1992, the first day counted in the ten-year period is March 1, 1992. The actual days method would compute nine calendar years -- to February 28, 2001 -- and then end the period 365 days later, on February 28, 2002. The months-days method would compute nine years and eleven months, to February 1, 2002, and then allow the IRS an additional "month" of 30 days -- which would end on March 2, 2002. In Tyrell (which involved more complicated facts because of a mid-month suspension of the period), the taxpayer used the elapsed days method and argued that the IRS was untimely by two days, while the IRS relied on the months-days method and argued that it was within the limitation by one day. The court held in the taxpayer's favor. United States v. Tyrell, 329 F.2d 341 (7th Cir. 1964). (b) PROPERTY SUBJECT TO LIEN A general federal tax lien attaches to all property and rights to property, both real and personal, tangible and intangible, belonging to the person liable for any tax remaining unpaid after demand. Code Section 6321. Property includes anything that is subject to ownership, capable of transfer, and subject to jurisdiction and process by a court. Citizen's State Bank v. Vidal, 114 F.2d 380 (10th Cir. 1940). State law determines whether a property interest exists. A federal district court has also determined that a federal tax lien could attach to property held by a trust created by the individuals against whom the taxes were assessed, stating that the trust was a nominee of the taxpayers. The taxpayers had transferred title to their principal residence to the trust, and the IRS filed the tax lien on the home for taxes owed by the individuals. City View Trust v. Hutton, No. 98-CV-1001-B (D. Wyo. Nov. 2, 1998). Once a property interest has been identified, federal law determines whether the tax lien has validly attached. Viva Ltd. v. United States, 490 F. Supp. 1002 (D. Colo. 1980). As the liens are created by federal law, the validity, durability, and qualified exceptions thereto are also determined by federal law. In re James Berg, No. 95-36205 (9th Cir. 1997). Once the lien comes into existence, it also extends automatically to all property subsequently acquired by the taxpayer during the life of the lien. For example, the lien attaches to income to be earned in the future for services to be rendered under an existing contract, even though the right to income is contingent on the satisfactory performance of those services. Atlantic National Bank v. United States, 536 F.2d 1354 (Ct. Cl. 1976). The existence of a properly-filed federal tax lien gives the government the power to levy on and seize the property, which then can be sold to pay the tax. Even though the lien attaches to all the taxpayer's property and to all property in which the taxpayer has an interest, some property is exempt from levy. Code Section 6334 describes such property exempt from levy. (c) PRIORITIES OF LIENS A federal tax lien securing payment of tax due is a statutory lien created by Code Section 6321. Because the lien arises by operation of law, it, exists even if it is not recorded. In re Suarez, No. 94-0338-BKC-AJC (Bankr. S.D. Fla. 1995); United States v. Sands, 174 F.2d 384 (2d Cir. 1949). However, the lien imposed by Code Section 6321 is not valid against certain competing claims until notice of the lien is correctly filed as required by the statute. The protected claimants are "purchasers, holders of security interests, mechanic's lienors, and judgment lien creditors." <95> These terms are defined in Code Section 6323(h) and Reg. Section 301.6323(h)-1. The term "purchaser" is defined in Code Section 6323(h)(6) as a person who acquires property for value and has, under state law, an interest that is valid against subsequent purchasers without notice. The term refers to those who obtain an interest (other than a security interest) under a lease, a written executory contract to purchase or lease property, an option to purchase or lease property, or an option to renew or extend a lease. The term "security interest" is defined in Code Section 6323(h)(1) as a contractual interest in property for the purpose of securing payment or performance of an obligation. To qualify, the interest must be in property that exists; the interest must be protected under local law against a subsequent judgment lien arising out of an unsecured obligation; and the holder of the interest must have parted with money or money's worth. To be given priority over a federal tax lien, a security interest must have existed before the tax lien arose. Under the regulations, a contract right is deemed to exist when the contract is made. An account receivable exists (for this purpose) when and to the extent that a right to payment is earned by performance. Reg. Section 301.6323(h)-1(a)(1). The term "mechanic's lienor" is defined in Code Section 6323(h)(2) as any person who, under local law, has a lien on real property (or the proceeds of a contract relating to real property) for services, labor, or materials furnished in connection with the construction or improvement of the property. The lien takes priority over a pre-existing federal tax lien only if it existed before the tax lien was filed. A mechanic's lien "exists" for this purpose from the date it is valid under local law against subsequent purchasers who lack actual notice, but is not deemed to "exist" until the claimant has furnished services, labor, or materials. The term "judgment lien creditor" is defined in the regulations, Reg. Section 301.6323(h)-1(g), as a person who has obtained a valid judgment, in a court of record and of competent jurisdiction, for recovery of designated property or for money. To qualify, the lien must be perfected. If the recovery is of money, perfection means the identity of the lien must be established. Attachments or garnishments are not judgment liens, even if under local law a subsequent judgment relates back to the time of attachment or garnishment; the claim must be reduced to judgment. If the lien is on real property, and under local law the lien is not effective against third parties until it is recorded, then the lien is not perfected for federal tax purposes until it is recorded. If the lien is on personal property, and seizure is necessary under local law for a judgment to be effective against third parties, then the lien is not perfected for federal tax purposes until the property is seized. PROPER FILING OF THE FEDERAL TAX LIEN: Code Section 6323(a) gives priority to purchasers, holders of security interests, mechanic's lienors, and judgment lienors whose claims arose before notice of the general tax lien was properly filed. Code Section 6323(f) describes where and how the IRS must file the lien. As a general rule, notice is filed at the place designated by the state in which the property is located. Real property is located in the state of its physical site. Personal property is located at the taxpayer's residence. If state law does not identify where to file notice of a federal tax lien, the notice may be filed with the clerk of the federal district court for the district in which the property subject to the lien is located. Filing of the notice establishes priority over purchasers, holders of security interests, mechanic's lienors, and judgment lienors; if these creditor's claims are perfected after the tax lien filing (unless disbursement is made within 45 days after the tax lien filing). If the IRS files a notice of tax lien on the same day and at the same time that another creditor's lien is perfected, that claimant and the government share in the taxpayer's fund in proportion to their claims. Effective for collection actions initiated after January 18, 1999, the Secretary is required to notify the taxpayer of the filing of a lien notice not more than five business days after the filing. Notification must be in writing and inform the taxpayer of the procedures for administrative appeals and of the right to request a hearing within 35 days of the filing. Code Section 6320. The time period within which a taxpayer may request a hearing is not extended merely because the taxpayer resides outside the United States. Reg. Section 301.6320-1T Q&A-C5. If the taxpayer requests a hearing, it must be held by the IRS Office of Appeals before an officer or employee who has had no previous involvement with respect to the tax that is the subject of the lien. Code Section 6320(b). The taxpayer may raise any relevant issue relating to the tax at the hearing, and a determination may be appealed to the Tax Court. The appeal must be made to the Tax Court if the underlying tax liability is of a type over which the Tax Court has jurisdiction (for example, income and estate taxes); otherwise the appeal must be to a U.S District Court. If the appeal is filed with the wrong court, there is a 30-day period after such determination within which to file the appeal with the correct court. Code Section 6320(c). The running of the ten-year period of limitations relating to collections is suspended during the hearing and appeal and for at least 90 days after a final determination of the issues raised at the hearing. Code Section 6320(c). The notice of the filing of the notice of lien must be given in person, left at the dwelling or usual place of business of the person to whom it must be given, or sent by certified or registered mail, return receipt requested, to that person's last known address. Code Section 6320(a)(2). A notice properly sent is sufficient to start the period within which the taxpayer may request a hearing; actual receipt is not a prerequisite to the validity of the notice. Reg. Section 301.6320-1T Q&A-A11. Failure to properly notify the taxpayer of the filing of the lien, however, does not affect the validity or the priority of the lien. The notice of a federal tax lien becomes effective upon filing, and neither the validity nor priority is conditioned on notification to the taxpayer. Reg. Section 301.6320-1T Q&A-A12. A request for a hearing may be made in any written form, although the IRS urges that Form 12153 be used. Reg. Section 301.6320-1T Q&A-C1. If a request for a hearing is not timely filed, a taxpayer may nevertheless request an administrative hearing, referred to as an equivalent hearing. Such a hearing is an opportunity granted to the taxpayer to address issues administratively, but it is not a formal right. The same issues that would have been addressed at a hearing the request for which was timely filed may be addressed at an equivalent hearing. Reg. Section 301.6320-1T(i)(1). Periods of limitation, however, are not suspended, and since any collection action is not required to be suspended during such a procedure, the decision on whether to proceed with collection during the pendency of an equivalent hearing is made on a case-by-case basis. Reg. Section 301.6320-1T Q&A-I3. The Secretary may withdraw a lien notice upon a determination that the notice was premature or not in accordance with administrative procedures; that the withdrawal will facilitate the collection of the tax liability; that the withdrawal would be in the best interest of the taxpayer; or if there is an agreement for payment by installments. If the notice is withdrawn, the taxpayer may request that credit agencies be notified. Code Section 6323(j). If notice of a federal tax lien is properly filed before other claimants' interests are perfected, the tax lien has priority except against claimants who can establish what is sometimes called "superpriority" under Code Section 6323(b) and 6323(c). SUPERPRIORITIES: Under Code Section 6323, even though notice of a federal tax lien has been properly filed, the government does not have priority over liens or claims by protected classes of persons who hold statutorily described interests in the taxpayer's property. These superpriorities are available to: (1) SECURITIES (STOCKS AND BONDS). Code Section 6323(b)(1). Purchasers who did not (at the time of purchase) have actual notice of or knowledge of the existence of the lien; and holders of a security interest in the security who (at the time their interest arose) did not have actual notice of or knowledge of the existence of the lien. (2) MOTOR VEHICLES. Code Section 6323(b)(2). Purchasers (of a motor vehicle) who did not (at the time of purchase) have actual notice or knowledge of the existence of the lien and who acquire possession of the motor vehicle before learning of the lien; a motor vehicle is defined in Code Section 6323(h)(3) as a self-propelled vehicle registered for highway use under the laws of any state or foreign country. (3) PERSONAL PROPERTY PURCHASED AT RETAIL. Code Section 6323(b)(3). Purchasers in the ordinary course of a seller's business who buy tangible personal property at retail, unless the purchaser knows or intends that the purchase will hinder tax collection. (4) PERSONAL PROPERTY PURCHASED IN A CASUAL SALE. Code Section 6323(b)(4). Purchasers who buy $1,000 (as adjusted for inflation) or less of household goods, personal effects, or tangible personal property exempt from levy under Code Section 6334 and who do not (at the time of purchase) have actual knowledge of the existence of the lien, or that the sale was one of a series of sales. For 1999, the adjusted limit is $1,040. Rev. Proc. 98-61, 1998-52 I.R.B. 1. (5) PERSONAL PROPERTY SUBJECT TO A POSSESSORY LIEN. Code Section 6323(b)(5). Holders of a local law lien on tangible personal property securing the repair or improvement of the property if the lienholder is and has been continuously in possession of the property from the time the holder's lien arose. (6) REAL PROPERTY TAX AND SPECIAL ASSESSMENT LIENS. Code Section 6323(b)(6). Holders of liens on real property if local law gives the lienholder priority over prior-in-time security interests in the property, and the lien secures payment of non- federal taxes or public utility charges. (7) RESIDENTIAL PROPERTY SUBJECT TO A MECHANIC'S LIEN. Code Section 6323(b)(7). Holders of a mechanic's lien on owner- occupied residential real property (with not more than four dwelling units), provided that the contract price for the repair or improvement is not more than $5,000 (as adjusted for inflation). The 1999 contract price limit is $5,220. Rev. Proc. 98-61, 1998-52 I.R.B. 1. (8) ATTORNEYS' LIENS. Code Section 6323(b)(8). Attorneys who hold a local law lien (to the extent of reasonable compensation) on a judgment or settlement amount; this priority is not available if the underlying action was against the United States and the United States has offset the judgment or settlement amount against the taxpayer's federal tax liability. (9) INSURANCE CONTRACTS. Code Section 6323(b)(9). The insurer on a life insurance, endowment, or annuity contract, at any time before the insurer had actual notice or knowledge of the tax lien; after the insurer had notice with respect to advances made automatically under an agreement entered into before the insurer had notice; or after satisfaction of a Code Section 6332(b) levy. (unless the Secretary delivers a notice of the tax lien's existence and the notice is executed after the satisfaction date). (10) DEPOSIT-SECURED LOANS. Code Section 6323(b)(10). Institutions at which the taxpayer has a savings deposit, share, or other account and that have given the taxpayer a loan secured by the account (provided the institution had no actual notice or knowledge of the existence of the tax lien). (11) COMMERCIAL FINANCING SECURITY INTERESTS. Code Section 6323(c). Holders of security interests in qualified property <102> covered by a written agreement entered into before the tax lien was filed and protected under local law against a judgment lien arising out of an unsecured obligation; the three categories of protected agreements are commercial transactions financing agreements; Code Section 6323(c)(2). real property construction or improvement financing agreements; Code Section 6323(c)(3). and obligatory disbursement agreements. Code Section 6323(c)(4). (12) OTHER SECURITY INTERESTS. Code Section 6323(d). Holders of security interests that arose after the tax lien was filed which do not fall into the previous categories if the security interest arose by reason of disbursements made within the 45 days after the tax lien was filed; to qualify, the person making disbursements must not have had actual notice or knowledge of the tax lien filing; the security interest must be in property covered by the terms of a written agreement entered into before the filing date, and the security interest must be protected under local law against a judgment lien arising out of an unsecured obligation. ACTUAL NOTICE OR KNOWLEDGE: Many of these exceptions require that the claimant have neither actual notice nor actual knowledge of the federal tax lien that attaches to the property in which the claimant has an interest. <103> Code Section 6323(i) defines actual notice or knowledge to mean that the existence of the federal tax lien has been brought to the attention of the individual conducting the transaction. An organization may be deemed to have notice or knowledge if, by its failure to exercise due diligence, the information was not brought to the attention of the appropriate person. The organization exercises due diligence if it maintains "reasonable routines for communicating significant information . . . and there is reasonable compliance with the routines." Code Section 6323(i)(1). LOCAL LAW PROTECTION: The priority of some of the categories depends on local law protection of the security interest against judgment liens obtained by unsecured creditors. Code Section 6323(c)(1)(B), and 6323(d)(2) . This rule is not to be confused with a state law exemption of certain security interests from the priority of a federal tax lien. States do not have the power to legislate local claimants' priority over the Code Section 6321 tax lien. R.J. Mills v. Commissioner, 84-1 U.S.T.C. 9290 (Bankr. E.D. Tenn. 1984). Federal law governs the priority of a federal tax lien over competing interests in real property. United States v. National Bank of Commerce, 472 U.S. 713, 722 (1985). But state law is used to determine whether the taxpayer has an interest in property, and the state's protection of some security interests against judgment claims of unsecured creditors is required for the holder of a security interest to qualify for priority under Code Section 6323(c) and (d) (categories 11 and 12 in the list above). EXTENT OF PRIORITY: Once it is determined that the claimant's interest in the taxpayer's property has priority over the government's tax lien, the extent of the protection is governed by Code Section 6323(e). This provision extends the priority of the competing claim to carrying charges or interest that applies to the secured obligation; reasonable charges of a trustee or agent; reasonable expenses (including attorneys' fees) incurred in collecting the obligation; reasonable costs of insuring, preserving, or repairing the property that serves as security; reasonable costs of insuring payment of the obligation; and amounts paid to satisfy a lien on the property that serves as security. Code Section 6323(e)(1)-(6). These additional amounts share the priority of the security holder's underlying claim, however, only if local law extends to them the same priority granted to the underlying claim. Code Section 6323(e) flush language. The availability of priority under the Code Section 6323 superpriority rules does not eliminate conflict between the government and a claimant who asserts a lien described in the section. If the property in question is a fund of money, the United States can levy on the fund even when it is in the hands of the claimant. Trust Co. of Columbus v. United States, 735 F.2d 447, 449 (11th Cir. 1984). The claimant's remedy is to litigate the priority of the claimant's lien over the tax lien; an injunction is not available to prevent the government from seizing the funds. Accounts coming into the ACS system may be subject to the filing of a Federal Tax Lien. A statutory lien for taxes is created by law under IRC Section 6321. The lien is filed in order to protect the U.S. government's interest when there is a balance due on an account, and circumstances exist that may indicate such protection may be warranted. A lien may be placed upon all property and rights to property, belonging to the person owing the taxes. A lien will include taxes due, interest, penalties, and any costs that may accrue. Once filed, all issues involving a lien are referred to the Special Procedures Function in the appropriate district. A Federal Tax Lien is reflected on a taxpayer's credit history for up to ten years. Once satisfied, the Service forwards a request to the County Clerk in the county of filing asking the status of the lien be updated to "satisfied". All fees charged by the state for both filing and releasing Federal Tax Liens are paid by the taxpayer. LEVIES/LIENS Potential enforcement actions, once an account has gone through the notice routine and has accelerated to ACS, include the issuance of levies and the filing of Federal Tax Liens. If the account meets certain established criteria, the computer AUTOMATICALLY issues a levy when the account enters into the ACS system. If the account does not meet the set criteria, our tax examiners review the information and may MANUALLY issue either a bank or wage levy. BANK LEVY When issuing a bank levy, a FORM 668-A(C), NOTICE OF LEVY, is sent directly to the financial institution. A FORM 8519, TAXPAYER'S COPY OF NOTICE OF LEVY, is sent directly to the taxpayer. The financial institution is required to freeze any account related to the taxpayer named on the levy. Accounts will be frozen to levy monies up to the full amount stated on the notice. Any funds greater than the amount shown will be made available to the account holder. Institutions may take 24 hours for this process. Any funds deposited by the account holder AFTER a Notice of Levy is issued are not subject to that notice. A subsequent Notice of Levy must be issued to freeze any subsequent deposits. The financial institution will hold the funds up to the full amount of the levy for 21 days before transmitting to the IRS. This 21day period allows taxpayers to contact us and negotiate alternative solutions to the outstanding balances. Taxpayers whose offers are rejected and who made good faith revisions of their offers and resubmitted them within 30 days of the rejection would be eligible for a continuous period of relief from collection by levy. see section on offer in compromise.
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