When taxpayer’s come into my office in Richardson, TX related to IRS tax debt issues, threat of or Notice of a Federal Tax Lien is one of the major reasons. Taxpayers often don’t understand the process, how a Tax Lien impacts them, and what they can do to avoid one or remove one. This is one in a series of articles discussing the IRS Tax Lien.
The Types of Liens
There are two types of liens that Congress has authorized the IRS to use under Section 6321 of the Internal Revenue Code, to use when a taxpayer is liable to pay any tax, and fails to pay the tax after a demand by the government for payment. The two types of liens are known as:
- The general lien, better known as the “Silent Lien”, and
- The Notice of Federal Tax Lien (NFTL)
In the last installment of our series on the IRS Tax Lien, we focused on the General Lien or the “Silent Lien”. Today we will focus on the Notice of Federal Tax Lien (NFTL).
Notice of Federal Tax Lien (NFTL)
A Notice of Federal Tax Lien (NFTL) is a public document filed to alert third parties that the taxpayer owes the IRS money. Remember that while the “Silent Lien” does attach to all of your property, no one, including future creditors, are aware of it. The NFTL changes that and the lien puts creditors on notice that the IRS has filed a lien to secure the government’s claim to the taxpayers assets.
Filing the NFTL is a consequential step taken by the government and has a serious impact on the taxpayer. Normally, the IRS sends a series of notices prior to filing an NFTL, but if you owe more than $10,000, the IRS will most likely file an NFTL against the taxpayer.
As mentioned, a Notice of Federal Tax Lien has several negative repercussions:
- It will affect your access to credit,
- It will affect your ability to sell or transfer property.
- It impacts property owned at the time that the lien was put in place and all property owned subsequent to the NFTL.
Some people believe that an NFTL supercedes all valid legitimate liens in place. It does not. For example, if the taxpayer owns a home with a mortgage against it, once the NFTL is filed, in the event of the sale of the property, the bank will still have the right to the repayment of its loan. However, the IRS would then have rights to any excess proceeds from the sale until it is paid in full for the tax debt.
An NFTL is generally filed in three places that are the locations where creditors generally conduct a UCC search on prospective borrower’s that include:
- At the town hall of the jurisdiction in which the taxpayer resides,
- With the secretary of the state of the taxpayer’s state of residence, and
- In the land records at the address where the taxpayer reside.
In the upcoming weeks, we’ll dig deeper into the IRS Lien process including what you can do if you have an NFTL filed against you. Stay Tuned!
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