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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. From his recent appearance on WRTV to this story here, Frank is everywhere. Couldn't happen to a nicer guy, although he should stop using Eric Schnauffer for his 7th Circuit briefs. They're not THAT hard.

  2. They learn our language prior to coming here. My grandparents who came over on the boat, had to learn English and become familiarize with Americas customs and culture. They are in our land now, speak ENGLISH!!

  3. @ Rebecca D Fell, I am very sorry for your loss. I think it gives the family solace and a bit of closure to go to a road side memorial. Those that oppose them probably did not experience the loss of a child or a loved one.

  4. If it were your child that died maybe you'd be more understanding. Most of us don't have graves to visit. My son was killed on a state road and I will be putting up a memorial where he died. It gives us a sense of peace to be at the location he took his last breath. Some people should be more understanding of that.

  5. Can we please take notice of the connection between the declining state of families across the United States and the RISE OF CPS INVOLVEMENT??? They call themselves "advocates" for "children's rights", however, statistics show those children whom are taken from, even NEGLIGENT homes are LESS likely to become successful, independent adults!!! Not to mention the undeniable lack of respect and lack of responsibility of the children being raised today vs the way we were raised 20 years ago, when families still existed. I was born in 1981 and I didn't even ever hear the term "CPS", in fact, I didn't even know they existed until about ten years ago... Now our children have disagreements between friends and they actually THREATEN EACH OTHER WITH, "I'll call CPS" or "I'll have [my parent] (usually singular) call CPS"!!!! And the truth is, no parent is perfect and we all have flaws and make mistakes, but it is RIGHTFULLY OURS - BY THE CONSTITUTION OF THIS GREAT NATION - to be imperfect. Let's take a good look at what kind of parenting those that are stealing our children are doing, what kind of adults are they producing? WHAT ACTUALLY HAPPENS TO THE CHILDREN THAT HAVE BEEN RIPPED FROM THEIR FAMILY AND THAT CHILD'S SUCCESS - or otherwise - AS AN ADULT.....

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