Federal tax liens: filing, release, withdrawal, discharge and subordination

How the lien arises

IRC 6321 creates the lien: if a person liable for tax “neglects or refuses to pay the same after demand”, the amount, with interest, penalties and costs, “shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.” Under IRC 6322 the lien arises at assessment and continues until the liability is satisfied or becomes unenforceable by lapse of time. Notice and demand under IRC 6303 is normally the first balance due notice; IRM 5.11.1.3.2 notes the taxpayer then has 10 days to pay before the lien arises. The statutory lien is secret; it binds the taxpayer and later transferees with notice, but it does not have priority over purchasers, holders of security interests, mechanic's lienors and judgment lien creditors until notice is filed (IRC 6323(a)).

What “property and rights to property” reaches. State law defines the taxpayer's interests, but federal law decides whether those interests are property the lien attaches to, and state-law exemptions and fictions do not control. In Drye v. United States, 528 U.S. 49 (1999), an heir disclaimed a $233,000 inheritance under Arkansas law so that it passed to his daughter; the Supreme Court held that “the disclaimer did not defeat the federal tax liens,” because the Code looks “to state law for delineation of the taxpayer's rights or interests, but to leave to federal law the determination whether those rights or interests constitute 'property' or 'rights to property' within the meaning of §6321.” In United States v. Craft, 535 U.S. 274 (2002), the Court applied the same approach to Michigan tenancy-by-the-entirety property, which state law shields from the creditors of one spouse, and concluded “that, despite the fiction, each tenant possesses individual rights in the estate sufficient to constitute 'property' or 'rights to property' for the purposes of the lien.” A lien against one spouse therefore encumbers entireties property, and a quitclaim to the non-liable spouse after the lien arose does not clear it. The IRS stated its administrative position in Notice 2003-60, summarized in IRM 5.17.2.5.2.4 (rev. 03-05-2019): the liable spouse's interest is generally valued at one-half, a transfer that does not discharge the lien leaves it on a one-half interest in the transferee's hands, the IRS will not apply Craft against third parties who reasonably relied on pre-Craft law in certain cases, and because of the harm to the non-liable spouse “the use of lien foreclosure for entireties property subject to the federal tax lien will be determined on a case-by-case basis.” For the levy side of the same principle, including joint bank accounts and the judicial sale of a co-owned home, see levies.

When the IRS files a notice

The Notice of Federal Tax Lien (NFTL, Form 668(Y)(c)) is filed in the public recording office state law designates (IRC 6323(f)). IRM 5.12.2.6 (rev. 10-14-2013) gives the general filing criteria: file when the aggregate unpaid balance of assessments is $10,000 or more; when an installment agreement does not meet streamlined, guaranteed or in-business trust fund express criteria; when an account of $10,000 or more is reported currently not collectible; and when property is outside a bankruptcy or the taxpayer lives abroad with known assets. Below the threshold, IRM 5.12.2.6 says: “Generally NFTLs will not be filed when the UBA is less than $10,000, but they may be filed if they will protect the government's interest”, and filing below $2,500 should be rare.

The IRS must send Letter 3172 within five business days after filing, which starts the lien CDP clock (IRC 6320). See Letter 3172 and CDP hearings; withdrawal and lien alternatives can be raised there. A filed NFTL is also an issue in offers and installment agreements: an NFTL can be filed while an offer is pending (IRM 5.8.1.16).

On credit reports, IRM 5.12.9.2.1 records that the major credit reporting agencies stopped including NFTLs in April 2018. But “NFTLs remain of public record and retain their effectiveness under IRC 6323”, and lenders and title companies still find them, which is why withdrawal still matters.

Release

IRC 6325(a) requires a certificate of release (Form 668-Z) within 30 days after the liability is fully satisfied or becomes legally unenforceable, or after the IRS accepts a bond. A release extinguishes the statutory lien and releases the notice. Three practical points:

• Immediate release for payment. A taxpayer who pays in full by a qualifying method can get an immediate release, record it personally and pay the recording fee, or let the IRS file it through normal processing (IRM 5.12.3.5.1).
• Self-release at the CSED. Form 668(Y)(c) shows a “Last Day for Refiling”. IRM 5.12.3.4.1.1: “When the 'Last Day for Refiling' passes and no refile has been done, both the statutory lien and the NFTL are immediately released.” No certificate is issued automatically, but one must be issued on request if the liabilities are satisfied or unenforceable. See the CSED.
• Accepted offers. The NFTL is released when the offer amount is paid, not at acceptance (IRM 5.12.3.5.3).

Release does not erase the public record of the filing; that is what withdrawal is for.

Withdrawal

IRM 5.12.9.2 explains the difference: “A Withdrawal only removes the effect of the NFTL whereas the Certificate of Release both releases the NFTL (paper document) and extinguishes the statutory tax lien.” Withdrawal is discretionary: “Withdrawal of the NFTL is not mandatory except when the NFTL was filed in violation of the automatic stay in bankruptcy.” IRC 6323(j)(1) allows withdrawal on four grounds:

Direct debit installment agreements. IRM 5.12.9.3.2.1 says an NFTL should generally be withdrawn when the taxpayer is in a direct debit installment agreement and: the unpaid assessed balance is $25,000 or less at the time of the request; the agreement will full pay within 60 months or before the CSED, whichever comes first; at least three consecutive direct debit payments have posted with no defaults; the taxpayer is otherwise compliant; there was no prior withdrawal for those modules; and the taxpayer asks in writing. Qualifying taxes are all individual taxes, business income tax, and all taxes for out-of-business entities. See streamlined installment agreements.

After release. Under IRM 5.12.9.9, a withdrawal after release under the best-interest ground is generally granted when the taxpayer asks in writing, fully satisfied the liabilities on the NFTL (payment, credit, most abatements, or a fully paid offer), a certificate of release was issued, and the taxpayer has filed all returns, including information returns, for the prior three years and is current on estimated tax payments and deposits. Expiration of the CSED and discharge in bankruptcy do not count as fully satisfied.

How to ask. Form 12277 is preferred, but any signed written request with the taxpayer's name, address and TIN, a copy or details of the NFTL, the basis for withdrawal, and authorization to notify creditors and credit agencies will do (IRM 5.12.9.4). The withdrawal certificate is Form 10916, and the IRS will send copies to creditors the taxpayer designates. A denial comes on Letter 4711 with CAP rights (IRM 5.12.9.8). See Form 12277.

Discharge of specific property

A certificate of discharge under IRC 6325(b) removes the lien from a specific property, usually so it can be sold. IRM 5.12.10.2 describes it as the tool “most often used when the taxpayer is selling or transferring ownership of a piece of property after the Notice of Federal Tax Lien (NFTL) is filed.”

Apply on Form 14135 with the attachments Publication 783 (Rev. 12-2022) describes, including appraisals and valuations, the sales contract or purchase agreement, a title report, the proposed closing statement and, for a 6325(b)(3) request, a draft escrow agreement. Mail to IRS Advisory Consolidated Receipts, 7940 Kentucky Drive, Stop 2850F, Florence, KY 41042 (Publication 4235 lists group contacts). Publication 783 is explicit on timing: “Please submit your application at least 45 days before the transaction date that the certificate of discharge is needed.” Do not send the payment with the application; Advisory tells the applicant the amount and when to pay. See Form 14135.

Subordination

A certificate of subordination under IRC 6325(d) moves another creditor ahead of the federal tax lien, typically for a refinance or a new loan; the lien stays on the property. The bases:

• 6325(d)(1): the IRS is paid an amount equal to the interest being subordinated, for example the cash-out from a refinance.
• 6325(d)(2): the IRS believes the amount it ultimately realizes will increase and collection will be facilitated. IRM 5.12.10.6.2 says this authority is for situations “similar to those in which an ordinary, prudent businessman would subordinate rights in a debtor's property in order to secure long-run benefits.” Its example is a dollar-for-dollar refinance to a lower rate that lowers payments and lets the taxpayer pay the tax. Lines of credit secured by receivables can also be subordinated under (d)(1) or (d)(2).
• 6325(d)(3): special estate tax liens under IRC 6324B.

Apply on Form 14134 with the documents listed in Publication 784 (Rev. 12-2022), to the same Advisory address, at least 45 days before the loan closing. Publication 784 notes that (d)(1) requires a payment, which is not sent with the application, and (d)(2) does not require one.

Non-attachment and appeals

A certificate of non-attachment under IRC 6325(e) states that the lien does not attach to property of a particular person, used most often when someone with a similar name is confused with the taxpayer on the NFTL (IRM 5.12.10.2). Denials of discharge, subordination, non-attachment and withdrawal requests can be appealed through the Collection Appeals Program (IRM 5.1.9.4), and NFTL filings themselves can be appealed in CAP before or after filing. If the taxpayer is in bankruptcy, see bankruptcy and tax debts: a properly filed pre-petition NFTL survives discharge as to exempt property (IRM 5.9.2.10.1.1).

Questions practitioners ask