Tax liens in bankruptcy sometimes don’t stand up to close scrutiny, to the delight and profit of bankruptcy debtors. I was reminded of two such instances by the excellent presenters at the NACBA 2021 Workshop.
Lien perfection follows state law
The secret tax lien attaches to all of a taxpayer’s property of any kind, wherever located. However, a tax lien is perfected against other creditors only by compliance with state laws on perfection of liens.
And during the pendency of a bankruptcy case, counsel only has to deal with the properly perfected tax lien. State law controls lien perfection.
Tax liens on realty
Under California state law, liens on real estate are perfected by filing notice of the lien with the county recorder. Recordation perfects a lien only on real estate in that county. So, property in other counties is subject to the tax lien only if the lien is recorded there.
In one of my recent cases, IRS recorded in Santa Clara County when the debtor’s property was in adjacent Santa Cruz County. Bingo, the IRS had only an unsecured claim.
So know how liens are perfected in your state and see if the IRS knows as well.
Liens on personal property
Liens on personal property under California law are perfected by filing with the Secretary of State.. Yet, more often than you’d think, IRS fails to file with the Secretary of State.
Bingo, the IRS has no perfected lien on any of the debtor’s assets other than real estate. Stock, business interests, vehicles, cash, art, all are free of the IRS lien.
All too often, the Service merely totals the value of the debtor’s equity in everything, and files its secured claim in that amount. So, it is vital that you know state law on the perfection of liens, and hold the IRS to strict compliance.
PRACTICE TIP: Make certain your client’s valuation of their “stuff” is economically reasonable, if you suspect there may be a tax lien. Your client may be held to their inflated value when it comes time to pay off the tax lien.
The limited life of liens
The second priceless tidbit from the workshop concerned the life-span of the recorded tax lien.
The general rule is that the lifespan of the lien matches the 10 year IRS collection statute. Once the collection statute runs, the lien is valueless. With that in mind, the Notice of Tax Lien includes language that automatically releases the lien on the expected date of the running of the statute.
But wait: the collection statute can be tolled by any number of events, including offer in compromise, collection due process hearing, or prior bankruptcy case .
So the actual expiration of the collection statute may be far longer than the original “10 years from assessment”. But absent action by the Service, the recorded tax lien is automatically released on the initial expiration date.
So, check the tax transcript for tolling events that might create a gap between the automatic release of the tax lien and the expiration of the collection statute. Therein may lie opportunity.