Keith Mack
A federal common-law lien is a type of lien that falls under the broader category of common-law liens. Liens are legal claims against an individual's property, serving as security for a debt or obligation. In the context of federal common law, liens are particularly relevant in situations involving alter egos and sham corporations used to evade legal responsibilities. These liens are governed by federal common law rather than state law, and they are established when certain conditions, such as the commingling of corporate and personal finances, are met. Common-law liens can be further classified into special liens and general liens, with special liens being more prevalent and requiring a strong link between the property and the service rendered.
| Characteristics | Values |
|---|---|
| Definition | A federal tax lien is the government's legal claim against your property when you neglect or fail to pay a tax debt. |
| Lien vs Levy | A lien is not a levy. A lien secures the government's interest in your property when you don't pay your tax debt. A levy takes the property to pay the tax debt. |
| Categories | Common-law liens are divided into special liens and general liens. |
| Special liens | The more common kind, requiring a close connection between the property and the service rendered. |
| General liens | Affect all of the property of the lienee in the possession of the lienor and stand as security for all of the debts of the lienee to the lienor. |
| Common-law lien rights | Only gives a passive right to retain; there is no power of sale. |
| Common-law lien transferability | A lien cannot be transferred; it cannot be asserted by a third party to whom possession of the goods is given to perform the same services that the original party should have performed. |
| Liens and death | If a tax lien attaches to one tenant's interest, it will survive the taxpayer's death and continue to encumber the property in the hands of heirs or legatees. |
| Liens and credit | Once the IRS files a Notice of Federal Tax Lien, it may limit your ability to get credit. |
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What You'll Learn
Federal tax lien categories
A federal tax lien is the government's legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government's interest in all your property, including real estate, personal property, and financial assets. Liens can be divided into three general categories: common-law liens, consensual liens, and statutory liens.
The primary federal tax lien is the "general" tax lien, sometimes referred to as the "secret" or "silent" lien. The federal tax lien arises automatically, that is, by operation of law, when a taxpayer fails or refuses to pay tax after notice and demand. The general tax lien under Section 6321 is broad; it generally encompasses all of the taxpayer's property or rights to property to secure payment of tax liability.
Section 6321 provides that if any person liable to pay any tax neglects or refuses to pay the tax after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue) shall be a lien in favor of the United States upon all property and rights to property belonging to such a person. A lien attaches to all of your assets (such as property, securities, vehicles) and to future assets acquired during the duration of the lien.
Once the IRS files a Notice of Federal Tax Lien, it may limit your ability to get credit. The lien attaches to all business property and to all rights to business property, including accounts receivable. If you file for bankruptcy, your tax debt, lien, and Notice of Federal Tax Lien may continue after the bankruptcy.
The Internal Revenue Code provides special protection for limited interests by giving them priority over the federal tax lien even though the interests come into existence after the filing of an NFTL. These special interests are called "superpriorities." If real estate taxes (whenever they accrue) are ahead of mortgages under local law, they will also be ahead of federal tax liens. This "superpriority" protects lienors whose liens arise from the repair or improvement of certain real property.
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Alter ego and federal common law
A federal tax lien is the government's legal claim against a taxpayer's property when they neglect or refuse to pay a tax debt. The lien protects the government's interest in the taxpayer's property, including real estate, personal property, and financial assets. The federal tax lien arises automatically when a taxpayer fails to pay their taxes after receiving a notice and demand.
An alter ego typically involves a sham corporation used to avoid legal obligations. To establish an alter ego, it must be demonstrated that the shareholders disregarded the corporate entity and used it for their own transactions. The IRS maintains that federal common law, rather than state law, determines alter ego status. No single factor determines the presence of an alter ego situation, but a combination of factors may indicate one. These factors include the commingling of corporate and personal finances and the use of corporate funds to pay personal expenses.
The alter ego analysis is similar under state and federal law, as "veil piercing" is not dependent on the nature of the liability. Abuse of the corporate form allows courts to employ veil-piercing under both state and federal common law. However, some sources suggest that there may not be a federal veil-piercing standard. For example, in the case of United Electrical, the Circuit Court of Appeals for the First Circuit stated that under Massachusetts common law, disregarding the corporate form is only permissible in rare situations.
To avoid a federal tax lien, taxpayers can simply file and pay their taxes in full and on time. If taxpayers cannot pay the full amount, payment options are available to help settle the tax debt over time. One option to remove a federal tax lien is to pay the tax debt in full, after which the IRS will release the lien within 30 days. Another option is to apply for a withdrawal of the Notice of Federal Tax Lien, which removes the public notice and prevents the IRS from competing with other creditors for the taxpayer's property. However, the taxpayer is still liable for the amount due, and eligibility requirements must be met.
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Liens vs levies
A federal common-law lien is a type of lien, which is a legal claim against your property to secure payment of a tax debt. Liens are distinct from levies, which are the legal seizure of property to satisfy a debt.
Liens and levies are financial controls on an individual's property by a creditor, such as the government. When an individual fails to pay their tax debts, the government can place a lien on their property, which is a legal claim that secures the government's interest in the property. This includes real estate, personal property, financial assets, securities, vehicles, and other assets, including future assets. The lien is activated once the IRS sends an itemized bill and Notice and Demand for Payment. The IRS files a public document, the Notice of Federal Tax Lien, to alert creditors that the government has a legal right to the property. This may affect the individual's ability to get credit or sell their property.
Levies, on the other hand, are the actual taking of property to satisfy the tax debt. If an individual fails to pay their taxes or make arrangements to settle their debt, the IRS can levy, seize, and sell any type of real or personal property that the individual owns or has an interest in. This includes wages, bank accounts, licenses, rental income, dividends, accounts receivable, commissions, vehicles, boats, and real estate.
It is important to note that while a lien does not allow the government to take possession of the property, it can impact the individual in various ways, such as their ability to obtain credit. Additionally, a lien may continue even after the individual has filed for bankruptcy. To remove a lien, the tax debt must be paid in full, and the lien will be released within 30 days. Alternatively, a withdrawal can be requested to remove the Notice of Federal Tax Lien, but the individual will still be liable for the amount due.
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Common-law liens
Liens can be divided into three general categories: common-law liens, consensual liens, and statutory liens. In the United States, the term lien generally refers to a wide range of encumbrances and would include other forms of mortgages or charges. A lien is a legal claim against your property to secure payment of your tax debt.
A federal tax lien comes into being when the IRS assesses a tax against you and sends you a bill that you neglect or refuse to pay. The IRS files a public document, the Notice of Federal Tax Lien, to alert creditors that the government has a legal right to your property. The lien protects the government's interest in all your property, including real estate, personal property, and financial assets.
Outside the US, a common-law lien may be defined as a passive right to retain a chattel (and, sometimes, documentary intangibles and papers) conferred by law. In common-law countries, an equitable lien gives rise to unique and complex issues. An equitable lien is a nonpossessory security right conferred by operation of law, which is similar in effect to an equitable charge.
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Liens and mortgages
A lien is a claim against your property as security for a debt or obligation. In the US, a lien refers to nonpossessory security interests, including mortgages or charges. In other common-law countries, a lien is a purely possessory form of security interest, and when possession of the property is lost, the lien is released.
Common-law liens are divided into special liens and general liens. Special liens are the more common type and require a close connection between the property and the service rendered. They can only be exercised regarding fees relating to the instant transaction. A general lien, on the other hand, affects all of the lienee's property in the possession of the lienor and stands as security for all of the lienee's debts.
A federal tax lien is a specific type of lien, which is the government's legal claim against your property when you neglect or fail to pay a tax debt. This includes real estate, personal property, and financial assets. The federal tax lien arises automatically when a taxpayer fails to pay their taxes after receiving a notice and demand.
To avoid a federal tax lien, one must simply file and pay their taxes in full and on time. If one is unable to pay the full amount, payment options are available to settle the tax debt over time. If an individual cannot file or pay on time, they should not ignore correspondence from the IRS, as other options may be available to reduce the impact of a lien.
Liens are distinct from levies, which involve the legal seizure of property to satisfy a tax debt. A levy takes the property to pay the tax debt, whereas a lien only secures the government's interest in the property.
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Frequently asked questions
A lien is a legal claim against your property to secure payment of your tax debt. A federal common-law lien is a type of lien that is based on federal common law rather than state law.
A levy is a legal seizure of your property to satisfy a tax debt. A lien, on the other hand, only secures the government's interest in your property and does not involve actually taking possession of it.
A federal tax lien comes into being when the IRS assesses a tax against you, sends you a bill, and you neglect or refuse to pay it.
Once the IRS files a Notice of Federal Tax Lien, it may limit your ability to get credit and sell your property.
You can avoid a federal tax lien by simply filing and paying all your taxes in full and on time. If you can't pay the full amount, payment options are available to help you settle your tax debt over time.
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