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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. Im very happy for you, getting ready to go down that dirt road myself, and im praying for the same outcome, because it IS sometimes in the childs best interest to have visitation with grandparents. Thanks for sharing, needed to hear some positive posts for once.

  2. Been there 4 months with 1 paycheck what can i do

  3. our hoa has not communicated any thing that takes place in their "executive meetings" not executive session. They make decisions in these meetings, do not have an agenda, do not notify association memebers and do not keep general meetings minutes. They do not communicate info of any kind to the member, except annual meeting, nobody attends or votes because they think the board is self serving. They keep a deposit fee from club house rental for inspection after someone uses it, there is no inspection I know becausee I rented it, they did not disclose to members that board memebers would be keeping this money, I know it is only 10 dollars but still it is not their money, they hire from within the board for paid positions, no advertising and no request for bids from anyone else, I atteended last annual meeting, went into executive session to elect officers in that session the president brought up the motion to give the secretary a raise of course they all agreed they hired her in, then the minutes stated that a diffeerent board member motioned to give this raise. This board is very clickish and has done things anyway they pleased for over 5 years, what recourse to members have to make changes in the boards conduct

  4. Where may I find an attorney working Pro Bono? Many issues with divorce, my Disability, distribution of IRA's, property, money's and pressured into agreement by my attorney. Leaving me far less than 5% of all after 15 years of marriage. No money to appeal, disabled living on disability income. Attorney's decision brought forward to judge, no evidence ever to finalize divorce. Just 2 weeks ago. Please help.

  5. For the record no one could answer the equal protection / substantive due process challenge I issued in the first post below. The lawless and accountable only to power bureaucrats never did either. All who interface with the Indiana law examiners or JLAP be warned.

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