10 Fun Facts About Federal Tax Liens

A Federal Tax Lien (herein after “FTL”) is a lien filed by the Internal Revenue Service for unpaid taxes.  Below are 10 fun facts for how an FTL can affect your closing. 

A FTL is effective and applicable to the taxpayer immediately upon assessment of the tax liability.  It becomes effective against third parties (like a buyer or title company) as soon as the Notice of Federal Tax Lien is filed in the real property records. 
FTLs attach to all property and rights to property of a taxpayer.  This means they attach to fee simple ownership in real estate.  They attach to easement rights.  They attach to liens held by the taxpayer.  They even attach to the community property interest of a spouse, even if they are not in title under the warranty deed. 
FTLs apply to property that is passed to heirs of a deceased person.  For example, mom and dad own a homestead.  There is a FTL against them.  When mom and dad pass the property goes to their three kids through inheritance.  The interest that the children receive in the property is subject to that FTL and the lien must be paid when the property is sold.
An FTL will also attach to property as soon as that property is acquired.  In a purchase transaction the FTL is subordinate to the purchase money lien but if property is acquired through inheritance or gift the lien attaches immediately.  In the example above let’s assume that one of the children has a FTL instead.  As soon as the parents pass title to the property passes to the heirs – it is an immediate process (although there may be paperwork required to document the passing, it happens right away).  That one child that has an FTL gets their one-third interest in the property but it is now subject to the FTL that they owe to the IRS.  When the property is sold that FTL will have to be paid in full or paid in an amount that represents 100% of the child’s ownership if their lien exceeds their ownership interest. 
Every FTL will include a “Last Day for Refiling” date shown on the recorded lien.  This date is important because IRS liens are valid for 10 years plus 30 days.  The IRS can renew their lien if they refile the lien prior to the Last Day for Refiling.  If they miss the deadline the lien is no longer enforceable and the property could be sold without paying the lien.  To sell a property under this line of thinking the title company has to be able to verify that nothing was filed in the real property records by the last filing date.   
If an owner has an FTL filed against them that lien must be addressed when the property is sold.  One way to do this is to order a payoff statement from the IRS and pay the lien at closing.  The IRS will issue a “Conditional Commitment to Discharge” letter and in this letter they inform the title company what amount must be paid in order to release the lien.  A title company is required to follow this letter exactly as to its instruction because it is the payoff statement for our file.   
Sometimes the FTL exceeds the available seller proceeds in the property. When this happens the IRS will issue the “Conditional Commitment to Discharge” letter accepting all sales proceeds from the sale.  This is an important piece of the puzzle when selling the property because without this instruction from the IRS a title company cannot issue an Owner’s Title Policy to the buyer (or their lender) insuring against liens affecting the property.  It’s important to note that this agreement from the IRS is “conditional” because the instructions in the letter must be followed exactly.  If the requirements set forth in the letter are not followed exactly the IRS will not release the lien. 
On occasion there was an FTL filed and the seller has since paid the lien.  The IRS does not always go back and file a release of lien even though the debt has been paid.  In these cases the seller will have to approach the IRS to obtain a “Certificate of Discharge.”  This certificate is filed to act as the release of lien.  This certificate must be obtained from the IRS prior to closing in order to close without collecting for the lien.  The seller, not the title company, must pursue obtaining this from the IRS.  The IRS does not move quickly so if your seller is taking this approach they need to start working on obtaining this well before you are under contract – they should start on it when you start talking about listing. 
Ordering payoff statement from the IRS is a very slow process.  With the pandemic their response time has increased and in many cases a title company may be ordering the payoff statement very early on in the transaction and still end up having to delay closing because the payoff has not been obtained.  It is very important that you review your Schedule C of the title commitment for listed FTLs.  If you see one you should be contacting your title company right away to see how your seller can help.  Many times your sellers can obtain a payoff faster that a title company can if they work on it diligently. 

Clearing FTLs can be a tough thing to do but it is required before your transaction can close.  The best way to navigate a transaction involving a FTL is to work closely with your Texas National Title escrow team. While we cannot complete the process for the seller but we can definitely help your client figure out what steps are required for them to get to closing!

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