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LIEN ON ME: Federal Tax Liens

Any lien showing up on your title search is a cause for concern, but the concern is always heightened when it is a federal tax lien. Because federal law trumps state law, different rules apply to these liens which can create confusion for title agents. This article will review the characteristics of federal tax liens and set out Old Republic’s requirements from a title insurance perspective.

Section 6321 of the Internal Revenue Code imposes a lien on “all property and rights to property, whether real or personal, “ belonging to any person who has failed to pay any tax due to the United States for the amount due, including interest, assessable penalties and costs.

The initial term of the lien is 10 years from the date of assessment and can be re-filed for an additional 10 year period. Re-filing must be within 10 years and 30 days from the date of assessment. The lien is created upon assessment, but section 6323(a) of the Internal Revenue Code provides that the federal tax lien will not be valid as against “any purchaser, holder of a security interest, mechanic’s lienor, or judgment lien creditor until notice thereof has been filed.” Accordingly, the priority of the lien is established upon recording of a notice of the lien in the official records.

A federal tax lien is controlled by federal law so the IRS does not have to adhere to Florida’s constitutional protections against forced sale of homestead property. The IRS can and does enforce its federal tax liens against the homestead property of the taxpayer. Another potential trap for the unwary title agent is that a federal tax lien

against one spouse can be enforced against property held by husband and wife as tenants by the entirety. On April 17, 2002, the United States Supreme Court in United States v. Craft changed our longstanding thinking on entireties property and ruled that federal tax liens can attach to property held by a taxpayer as a tenant by the entirety. The Supreme Court reasoned that under section 6321, a federal tax lien attaches to “all property and rights to property” of the delinquent taxpayer and noted that federal courts are not bound by state law when interpreting federal legislation.

You will be relieved to know that some of Florida’s lien laws are similar to the Federal law. For example, the IRS will treat a “true” purchase money mortgage as superior to its federal tax lien against the borrower/buyer, even if the mortgage is recorded after the lien. To be a true purchase money mortgage, all of the loan proceeds must be used to purchase the real property and not be used for other payments (i.e., paying off credit cards, etc.). Remember, this only applies to purchase money mortgages and cannot be relied on for refinance situations.

Additionally, federal tax liens that are subordinate to the foreclosing mortgage and recorded prior to the foreclosure lis pendens, can be wiped out in a proper mortgage foreclosure. The United States must be named as a defendant and properly served, and retains a 120 day right of redemption. The redemption period generally commences with the entry of the Certificate of Title (the “CT”). If you are asked to insure a sale or mortgage of the property prior to the expiration of the 120 day right of redemption, you will either need to include an exception for the redemption period in the policy or obtain a release from the United States.

If the federal tax lien is junior to the mortgage being foreclosed but is recorded AFTER the foreclosing lis pendens, the federal tax lien may be foreclosed out without having to name the United States as a defendant in the action. It is up to the United States to intervene in the case within 30 days after the recording of the LP. If the United States does not intervene and the foreclosure proceeds to the issuance of a CT, its lien is foreclosed out and it has no right of redemption.

By: Jeanne Mott, Esq., Old Republic Nat’l Title Ins. Co. ~ In The Title Corner ~ 4th Qtr 2012, Vol 15, Issue 4 

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