The Definitive Guide To Tax Liens

A general tax lien automatically attaches to all property and rights to property (real and personal) that belong to the taxpayer if the taxpayer fails to pay tax liability after assessment and demand. In addition, the tax lien attaches to property and interest in property acquired by the taxpayer after the date of assessment until the tax lien expires, is released, or the property is discharged from the tax lien. However, the tax lien generally does not attach to property transferred before the date of assessment except when the transferre is the nominee or alter ego of the taxpayer.

Sacramento Law Group LLP represents clients in tax resolution matters wiht the IRS and the State of California. Specifically, our experienced tax attorney helps clients get out of tax debt through offers in compromise, installment agreements, and non-collectible status applications. If the IRS has recorded a tax lien encumbering your property, call the Law Office of Jin Kim at (916) 299-9913 for a free tax relief consultation.

The Government’s Interest in a Tax Lien is Derivative 

A tax lien attaches to all of the taxpayer’s property and rights to property. However, the security of the lien is only derivative.  When we speak of tax liens as being derivative, we mean that the tax lien only encumbers the taxpayer’s interest in property. In other words, the government only “stands in the taxpayer’s shoes.” While the tax lien attaches to and encumbers the taxpayer’s property, it is subject to the same restrictions, conditions, and limitations that the taxpayer has concerning the property. Hence, a tax lien attached to a taxpayer leasehold interest terminates when the lessee’s interest ends by contract or court judgment. 

However, certain restrictions might operate to limit a taxpayer’s right, but not the government’s through a general tax lien. One of the restrictions is the statute of limitations. It runs against the taxpayer but not against the government. Another example is an insurance clause requiring the insured-taxpayer to surrender the policy to receive its surrender value. It, as well, does not affect the operation of the lien. 

Tax Liens Encumber After-Acquired Property 

We know that a general tax lien attaches to all of the taxpayer’s property and rights to property as of the assessment date. The general tax lien’s attachment to the property continues until the tax liability is satisfied or becomes unenforceable by lapse of time (IRC Section 6322). Hence, a general tax lien not only attaches to properties the taxpayer owns at the time of assessment, but it extends to after-acquired property until tax payment or collection of the tax is barred by the statute of limitations. 

Tax Liens Generally Do Not Attach to Property Transferred Before the Assessment Date 

A general tax lien attaches only to property owned or that in which the taxpayer has an interest. Therefore, property that a taxpayer transferred before assessment by the IRS generally cannot be subject to attachment of the tax lien. The reason for this is because it does not belong to the taxpayer anymore.   

Exceptions To Transfers Before Assessment 

However, there are exceptions to the general rule where a tax lien attaches to the transferred property. In general, the transfer of property prior to tax assessment must be bona fide. The government determines whether the transfer is bona fide by relying on nominee or alter ego theories. A nominee is one who only holds bare legal title to the property for the benefit of another. A mere formal transfer to a nominee will not defeat the attachment of a tax lien. The same is true for the taxpayer’s property held by an alter ego; it is still subject to tax lien attachment. 

Nominee

The issue on whether a person is the taxpayer’s nominee may be determined through specific badges of fraud that state law may identify, such as:  

• Lack of consideration  
• Transfers of taxpayer’s entire estate  
• Taxpayer’s relationship to the alleged nominee  
• Pendency or threat of litigation  
• Secrecy or hurriedness of the transfer  
• Departure from the usual method of business  
• Taxpayer’s retention of possession of the transferred property  
• Reservation of benefit to the taxpayer  

Alter Ego

On the other hand, in alter ego issues, the following factors are considered. A person is an alter ego if he: 

• Has control or authority over the entity  
• Controls the entity’s actions without the need to consult others  
• Uses the entity to shield himself from personal liability  
• Uses the business entity for personal financial benefit  
• Mingles his personal affairs to those of the business entity  
• Uses the business entity to assume his own or another’s debts or whether he uses his funds to pay the business entitys’ debts. 

A taxpayer must always remember that a tax lien cannot be defeated by abandoning an interest in the property, like renunciation of an interest in an estate. In general, the Internal Revenue Code has been drafted to circumvent tax-avoidance tactics like property transfers.

How To Get Rid of A General Tax Lien

As mentioned above, tax liens attach to property until they expire, are released, or the property is discharged from the tax lien. Accordingly, tax resolution actions such as offers in compromise can help taxpayers satisfy their tax obligations and resolve tax liens. To learn more about your tax relief options call Sacramento tax attorney Jin Kim at (916) 299-9913 for a free consultation.