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IBA: Tax Liens Live After Debts, Clients Die

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By Adam D. Christensen

In Shakespeare’s The Tempest, the drunken butler, Stephano, quips, “He that dies pays all his debts.” Obviously, the Bard’s fool had no experience with tax liens, which may cause as many problems for clients during and after life as the underlying debt itself.

Tax liens are filed when a taxpayer (individual or corporate) owes federal or state taxes from income, excise, employment, or sales tax. The taxing agencies that issue tax liens, the Internal Revenue Service and the Indiana Department of Revenue, assert that liens protect the government’s interest in a delinquent taxpayer’s property and increase the likelihood of collection. Given the scope and permanence of tax liens, these goals are doubtlessly met.

However, the unintended consequences of tax liens can serve not only as a complication but a blockade to collection and may cause the taxpayer irreparable harm along the way.

Tax liens attach to all assets owned by the taxpayer at the time the lien is filed and to any assets acquired afterward. Homes and other real estate, lines of credit, vehicles, equipment, even some investments may be effected. What’s more, tax liens stick to these assets until the underlying tax is paid in full regardless whether the taxpayer can afford to pay the debt or not.

By design, a tax lien restricts an owner’s ability to sell or transfer assets by clouding title. When the asset is sold, the government is entitled to an amount equal to its interest up to full, unencumbered value of the asset. Without payment, the lien remains and the asset cannot be transferred with clear title. Without clear title, the sale may be challenged in court and in due course reversed.

What’s more, Indiana is a “first to file” state with respect to secured interests, meaning the tax lien falls in line behind any prior secured interests in the asset, such as a mortgage. In foreclosure and property tax sale cases, a tax lien effectively wipes out any equity that may have been used to modify a mortgage or pay property taxes to avoid repossession.

Tax liens also impair a taxpayer’s ability to refinance. In addition to muddying priority and sapping equity, tax liens are listed on credit reports and can decrease a taxpayer’s credit rating by 100 points or more. Alarmingly, even seven years after the debt is paid in full, a notation showing a prior lien may negatively affect a taxpayer’s credit and ability to borrow.

For taxpayers working in fields such as finance, real estate, and law, tax liens can be ruinous. When a tax lien is filed, these people are at risk of losing their professional licenses, their ability to seek new employment, and even their current jobs.

Finally, and despite Stephano’s assertion, tax liens remain attached to assets even if the taxpayer dies before satisfying the debt. The liens entitle the taxing agency to an interest in the taxpayer’s estate presumably so the taxpayer can repay his debt from beyond the grave.

Often, tax liens are viewed by many practitioners as akin to judgment liens. However, tax liens may be more devastating because of the speed with which they are issued.

Feasibly, a tax lien may be filed roughly 90 days after tax assessment and without a court order. IRS procedures authorize automated lien filings when an unpaid tax balance is greater than $5,000. The IDR has no such restrictions and may file a lien without regard to the balance amount. Compare this to the lengthy, burdensome, and costly process necessary to secure a judgment lien.

In the past decade, the IRS has increased tax lien filings by 550%, and, though Indiana does not publish statistics relating to tax lien filings, it is likely the IDR has kept pace. Practitioners today are more likely than ever to encounter tax lien issues. Though attorneys may not be able to cure all the harms caused by a tax lien, here are four tips to ensure the damage is minimal.

The IRS may not file a lien for unpaid balances up to $25,000 for individuals and $10,000 for corporate entities if the taxpayer enters into an agreement to pay the debt in 60 or 24 months, respectively.

New IRS guidelines allow for taxpayers to request removal of tax liens if the underlying balance is reduced below these threshold amounts and the taxpayer agrees to have the agreement payments debited directly from a bank account.

Filing Form 12277 once a tax debt is paid will cause the IRS to “withdraw” a lien, rather than “remove” it, and will immediately expunge the lien from the taxpayer’s records.

Requesting lien subordination may not only give a taxpayer a chance to use equity to pay tax debt, it may help challenge the lien filing in Tax Court (Alessio Azzari v. Commissioner, 136 T.C. 9 (2011)).•

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  1. So that none are misinformed by my posting wihtout a non de plume here, please allow me to state that I am NOT an Indiana licensed attorney, although I am an Indiana resident approved to practice law and represent clients in Indiana's fed court of Nth Dist and before the 7th circuit. I remain licensed in KS, since 1996, no discipline. This must be clarified since the IN court records will reveal that I did sit for and pass the Indiana bar last February. Yet be not confused by the fact that I was so allowed to be tested .... I am not, to be clear in the service of my duty to be absolutely candid about this, I AM NOT a member of the Indiana bar, and might never be so licensed given my unrepented from errors of thought documented in this opinion, at fn2, which likely supports Mr Smith's initial post in this thread: http://caselaw.findlaw.com/us-7th-circuit/1592921.html

  2. When I served the State of Kansas as Deputy AG over Consumer Protection & Antitrust for four years, supervising 20 special agents and assistant attorneys general (back before the IBLE denied me the right to practice law in Indiana for not having the right stuff and pretty much crushed my legal career) we had a saying around the office: Resist the lure of the ring!!! It was a take off on Tolkiem, the idea that absolute power (I signed investigative subpoenas as a judge would in many other contexts, no need to show probable cause)could corrupt absolutely. We feared that we would overreach constitutional limits if not reminded, over and over, to be mindful to not do so. Our approach in so challenging one another was Madisonian, as the following quotes from the Father of our Constitution reveal: The essence of Government is power; and power, lodged as it must be in human hands, will ever be liable to abuse. We are right to take alarm at the first experiment upon our liberties. I believe there are more instances of the abridgement of freedom of the people by gradual and silent encroachments by those in power than by violent and sudden usurpations. Liberty may be endangered by the abuse of liberty, but also by the abuse of power. All men having power ought to be mistrusted. -- James Madison, Federalist Papers and other sources: http://www.constitution.org/jm/jm_quotes.htm RESIST THE LURE OF THE RING ALL YE WITH POLITICAL OR JUDICIAL POWER!

  3. My dear Mr Smith, I respect your opinions and much enjoy your posts here. We do differ on our view of the benefits and viability of the American Experiment in Ordered Liberty. While I do agree that it could be better, and that your points in criticism are well taken, Utopia does indeed mean nowhere. I think Madison, Jefferson, Adams and company got it about as good as it gets in a fallen post-Enlightenment social order. That said, a constitution only protects the citizens if it is followed. We currently have a bevy of public officials and judicial agents who believe that their subjectivism, their personal ideology, their elitist fears and concerns and cause celebs trump the constitutions of our forefathers. This is most troubling. More to follow in the next post on that subject.

  4. Yep I am not Bryan Brown. Bryan you appear to be a bigger believer in the Constitution than I am. Were I still a big believer then I might be using my real name like you. Personally, I am no longer a fan of secularism. I favor the confessional state. In religious mattes, it seems to me that social diversity is chaos and conflict, while uniformity is order and peace.... secularism has been imposed by America on other nations now by force and that has not exactly worked out very well.... I think the American historical experiment with disestablishmentarianism is withering on the vine before our eyes..... Since I do not know if that is OK for an officially licensed lawyer to say, I keep the nom de plume.

  5. I am compelled to announce that I am not posting under any Smith monikers here. That said, the post below does have a certain ring to it that sounds familiar to me: http://www.catholicnewworld.com/cnwonline/2014/0907/cardinal.aspx

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