What Is the IRS Tax Lien Statute?
The American tax system is a pay as you go system whereby all taxpayers are expected to pay their federal income tax as they earn money. Taxpayers are expected to pay all tax owed on or before the Internal Revenue Service's April 15th due date and those who fail to pay or make arrangements to pay could find that the IRS has placed a lien on their property. Understanding the statute of limitations as it relates to federal liens is essential to understanding your rights when confronted with a tax lien.
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Purpose
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A federal tax lien is intended to secure a claim against your property. The claim ensures the government's right to the property in the instance that the property is sold, or there is a judgment issued against the property. Once issued, the lien will usually remain on the taxpayer's property until the tax is paid in full or until the statute of limitations has expired. If a lien is issued, it attaches to your property and notifies your creditors that the IRS has a claim against your property. Property not only includes tangible items such as boats and houses, but also certain "rights" a taxpayer may have.
How It Works
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After the IRS sends a taxpayer a Demand for Payment Letter and the taxpayer either neglects or refuses to pay, then the IRS issues the lien in the amount of your tax debt. By law, the IRS must allow you 10 days to respond to the Demand for Payment Letter before issuing the lien. The IRS is required by law to notify you within 5 days of filing the federal tax lien. In addition, the notice of lien must be sent by certified mail, given in person, or left at the taxpayer's home or business. The notification you receive will include your right to appeal as well as the total amount of tax (plus penalties and interest) due. The statute of limitations for IRS collection enforcement is 10 years from the date the tax was assessed. After the statute expires, your lien will automatically be released and you should receive a Certificate of Lien Release in the mail from the IRS.
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Considerations
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The IRS statute of limitations, the time frame within which the IRS can impose a lien, can be increased if the taxpayer enters into an agreement with the IRS. Such agreements are often entered into when there is a substantial tax debt and the taxpayer requests to set up a Partial Payment Installment Agreement (PPIA) to pay a lower amount than the one required by the IRS. The IRS will often allow the reduced payment amount if the taxpayer agrees to extend the statute of limitations. The only property exempt from an IRS lien is that held in "trust for a non-competent Indian (not a tribe)."
Tenancy
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In cases where there is more than one owner to a property, joint tenancy, and only one owner owes taxes, the lien still attaches to the entire property and may be sold or foreclosed on. The joint tenant who does not owe taxes will be compensated from the sale. Taxpayers living in the community property states of California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin should refer to Area Counsel or call the IRS at 1-800-829-1040 to determine the enforcement of the lien.
Warning
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In addition to property, a tax lien also attaches to cash or rights to cash which includes bank accounts. The lien also attaches to wages as those wages become the property of the taxpayer. State laws protecting a portion of the taxpayer's income from liens do not apply to the IRS.
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References
Resources
- Photo Credit tax forms image by Chad McDermott from Fotolia.com
