Q: I am aware that federal tax liens raise a variety of complicated title questions. What are the most important ones for title agents to address?

A: Steven Winkler, WFG’s chief underwriting counsel, provides the following list of questions (and answers) for you, with input from Roger Blauvelt, vice president and national agency counsel for WFG, and Alan Fields, WFG senior vice president/director of Underwriting Services.

When does a federal tax lien arise?

The lien arises when the IRS makes an assessment for unpaid taxes. (26 U.S.C. Section 6322) This occurs when the IRS determines that taxes owed by a person liable to pay the taxes (generally, the “taxpayer”) have not been paid and such person “neglects or refuses to pay the same after demand” by the IRS. (26 U.S.C. Section 6321) The lien may be assessed without any further notice to the delinquent taxpayer or anyone else, and it will remain a secret lien until a Notice of Federal Tax Lien is recorded in the land records.

Does the lien affect only the property address to which the notice is sent?

No. The lien attaches to all property and rights to property owned by the taxpayer at the time of the assessment and to any property the taxpayer acquires subsequently. (26 USC Section 6321) The address to which the lien notice is sent simply reflects the taxpayer’s residence on file with the IRS. If that residence is a month-to-month rental, for example, the lien would not affect the fee title to that property owned by someone else.

How would the lien affect parties who purchase the property before the lien notice has been filed?

The Internal Revenue Code provides that the lien is not valid against purchasers, secured lenders, mechanics lien creditors and judgment lien creditors who have no actual knowledge of the lien and who record their interest before the notice of tax lien is filed. (26 USC Section 6323(a))

What is the duration of the lien?

The lien itself, as distinguished from the notice of the lien, remains in effect as long as any portion of the taxpayer’s liability remains outstanding or becomes unenforceable by lapse of time. (26 U.S.C. Section 6322) However, as commonly reflected in the filed Notice of lien, the lien expires automatically 10 years after the assessment date stated in the Notice, unless extended by refiling. (26 U.S.C. Section 6502(a)(1); 26 U.S.C. Section 6323(g)) The last date for refiling is shown on the face of the lien notice, which is 30 days beyond the 10-year expiration period because the IRS has up to that 30-day period to refile. (26 U.S.C. Section 6323(g)(3)(a)) The notice also contains language stating that failure to refile by the last refiling date operates as a release. (26 U.S.C. Section 6325(a)(1))

Are there other ways a notice of federal tax lien can be released?

Upon payment of all obligations secured by the lien, the IRS will discharge it by a written, recordable Certificate of Release. (26 U.S.C. Section 6325(a)) You should not rely on the Unpaid Balance of Assessment shown on the lien itself, however, because even if that balance is zero, significant penalties and interest may have accrued. If you are the settlement agent that will be paying off the lien, you must contact the IRS to determine the amount of the payoff. (You’ll need a form signed by the assessed taxpayer authorizing you to deal with the IRS in this respect.) There are also IRS procedures covering partial releases of a specific property, the abandonment of liens determined to be worthless, and confusion about the identity of the taxpayer responsible for the delinquency (for which you will want the IRS to issue a ”Certificate of Non-attachment”). All of these procedures take time and some are completely discretionary with the IRS, which means: Don’t expect a speedy decision and don’t assume that the decision will be favorable.

How does a federal tax lien affect a foreclosure sale?

As a junior lienholder under the Internal Revenue Code, the United States has the following foreclosure and redemption rights, pursuant to 26 USC §7425:

  1. If the United States is not made a party to any action, including a foreclosure and judicial sale, then the sale shall me made subject to the federal lien.
  2. If the United States did not have a recorded lien at the time a judicial action commenced (i.e., its lien was recorded only after the commencement of an action), then the federal lien is treated as a subordinate matter and discharged or divested according to local law. No notice to the United States is necessary in this situation.
  3. In the case of a non-judicial sale, if the IRS notice of tax lien was filed more than 30 days prior to the sale, then the United States must be given notice of the sale not less than 25 days before the sale date. If notice is proper, the lien will be discharged by the sale. If the IRS notice of tax lien was not filed more than 30 days prior to the sale, no notice to the United States is required and the lien will be discharged by the sale.

Following a judicial or non-judicial sale, the United States may redeem its interest at any time within 120 days from the date of the sale or within the redemption period allowed under state law, whichever is longer. A title insurance policy issued during the 120-day redemption period must contain the following exception: “Right of the IRS to redeem the real estate within 120 days from the foreclosure sale pursuant to 26 USC 7425(d).”

How is the IRS given notice in a foreclosure sale?

In a judicial foreclosure, notice must be served on the U.S. Attorney for the district in which the property is located, with copies sent by Registered or Certified mail to the Attorney General in Washington. (28 U.S.C. Section 2410(b)). In a non-judicial foreclosure, even in states where local practices may not require notice to subordinate lienholders, a notice of sale must be given, in writing, by registered or certified mail or by personal service, not less than 25 days prior to the sale, to the Advisory group manager, in the Field Collection Area where the sale is to be held. (Internal Revenue Manual, § (06-11-2010); 26 U.S.C. Sections 7425(b) and (c)(1)). A foreclosure sale completed without proper notice may still be subject to the tax lien.

Are there any useful IRS Publications regarding foreclosure notices?

Yes. For up-to-date guidance on notices to the IRS of non-judicial foreclosure sales, in particular, see the latest versions of IRS Publication 786 (Notice of Nonjudicial Sale of Property) and IRS Publication 4235 (Technical Services (Advisory) Group Addresses) available on the irs.gov website. In addition to providing the appropriate addresses around the country for foreclosure notices, the front page of Publication 4235 also provides a useful list of other publications relating to federal tax liens and the release of them.