Definition
A tax lien is a governmental claim against property when the owner fails to pay tax debt. Priority of Tax Lien refers to the hierarchical order in which liens are paid off in the event of a property sale. Federal tax liens generally take precedence over other liens, but there are vital exceptions.
Explanation
- A federal tax lien arises automatically when a taxpayer fails to pay federal taxes owed.
- The lien attaches to all assets (real property, personal property, and financial securities) and future assets acquired during the lien’s duration.
- Priority means that the federal tax lien will be paid before other liens when the property is sold, given that it has been properly recorded.
- A federal tax lien is not valid against these categories until recorded:
- Purchaser: Someone who buys the property.
- Holder of a Security Interest: Individuals or entities holding a legally recognized right to be paid before others.
- Mechanic’s Lienor: A person who has supplied labor or materials for work on the property.
- Judgment Lien Creditor: Creditors who obtained a judgment against the property owner.
Superpriorities
Certain liens, known as “superpriorities,” can have precedence over a federal tax lien:
- Securities: Instruments like stocks and bonds, whose sale can override a tax lien.
- Automobiles: Certain rules allow vehicle liens to be prioritized over tax liens.
Examples
- Real Property Sale: A homeowner owes back taxes and also has a mortgage and a mechanic’s lien on the property. If sold, the federal tax lien will be settled before the mortgage and mechanic’s lien, given it was properly recorded.
- Unrecorded Tax Lien: If a federal tax lien isn’t recorded before the property is sold, a purchaser may take precedence over the lien.
- Mechanic’s Lien: A contractor has filed a mechanic’s lien for unpaid work prior to the recording of a tax lien. In this case, the mechanic’s lien can take priority over the tax lien.
Frequently Asked Questions
What is a tax lien?
A tax lien is a legal claim made by a government entity against a property when the owner fails to pay a tax debt.
When does a federal tax lien become effective?
A federal tax lien becomes effective when the IRS assesses a tax against the taxpayer and the taxpayer neglects or refuses to pay the debt.
Are federal tax liens automatically superior to all other liens?
No, federal tax liens are not automatically superior to all other liens. Specific exceptions include purchasers of the property, holders of security interests, mechanic’s lienors, and judgment lien creditors when the lien is not properly recorded.
What happens when a tax lien is not recorded?
If a tax lien is not recorded, it is not valid against certain categories of lienholders, such as new purchasers or those who acquired interest in the property before the lien was recorded.
Can a federal tax lien be subordinate to other types of liens?
Yes, superpriorities, such as those on certain securities and vehicles, can be superior to federal tax liens.
Related Terms
- Lien: A legal right granted by the owner of the property to a creditor, permitting the creditor to seize the property if a debt isn’t repaid.
- Mechanic’s Lien: A security interest in the title to property for the benefit of those who have supplied labor or materials that improve the property.
- Security Interest: A legal claim on assets granted to creditors to ensure repayment of the debt.
- Judgment Lien: A court ruling giving a creditor the right to take possession of a debtor’s property if the debt is not settled.
Online References
Suggested Books for Further Studies
- “The Essential Guide to Federal Tax Liens” by David Steven Meyer
- “Federal Tax Collection Procedure: A Practical Guide to the IRS” by James B. Leever
Fundamentals of Priority of Tax Lien: Taxation and Property Law Basics Quiz
### What is a federal tax lien?
- [x] A governmental claim against property when the owner fails to pay tax debt.
- [ ] A claim by a mortgage lender for unpaid loans.
- [ ] A legal claim by a contractor for unpaid work.
- [ ] A judgment by a court for unpaid settlements.
> **Explanation:** A federal tax lien is a governmental claim against the property of a taxpayer who fails to pay tax debt.
### A tax lien becomes effective when which of the following occurs?
- [ ] The property owner takes out a loan.
- [x] The IRS assesses a tax and the taxpayer neglects or refuses to pay.
- [ ] The property owner sells the property.
- [ ] A court issues a ruling against the property owner.
> **Explanation:** A tax lien becomes effective when the IRS assesses a tax liability and the taxpayer neglects or refuses to pay the assessed taxes.
### Who may not have priority over a federal tax lien?
- [ ] Holder of a security interest
- [x] Homeowner without a mortgage
- [ ] Mechanic's lienor
- [ ] Judgment lien creditor
> **Explanation:** Federal tax liens typically have priority over others unless otherwise noted due to superpriorities or non-recording issues.
### What does "superpriority" refer to?
- [ ] A tax lien that covers all assets and income.
- [x] Liens that have special priority over federal tax liens.
- [ ] The government's right to seize all property.
- [ ] A legal provision to make all other liens subordinate.
> **Explanation:** Superpriority refers to liens that have special precedence over federal tax liens, such as securities liens or certain vehicle liens.
### If a tax lien is unrecorded, which of the following could have priority over it?
- [x] Subsequent purchaser of the property
- [ ] Holder of back taxes
- [ ] Contractor with a mechanic's lien
- [ ] All existing lienholders
> **Explanation:** If a tax lien is not recorded, a subsequent purchaser could have priority over it, as they may not have notice of the existing tax lien.
### What is a mechanic's lien?
- [x] A lien from a contractor for unpaid labor/materials.
- [ ] A security interest on vehicle defects.
- [ ] A government claim for unpaid taxes.
- [ ] A court-ordered lien for breach of contract.
> **Explanation:** A mechanic's lien is a security interest filed by contractors or suppliers for unpaid labor or materials supplied for improvements on property.
### What is the outcome if a tax lien is properly recorded before other liens?
- [ ] The other liens take precedence.
- [ ] The property owner negotiates the payment order.
- [x] The tax lien generally has priority.
- [ ] The lien is voided if unpaid.
> **Explanation:** If the tax lien is properly recorded, it generally takes priority over other subsequently filed liens.
### Who generally issues a judgment lien?
- [ ] IRS
- [ ] Contractor
- [x] Court
- [ ] Property owner
> **Explanation:** A judgment lien is typically issued by a court as a result of a legal judgment against the property owner.
### In what scenario would a purchaser have priority over a tax lien?
- [ ] When the lien is properly recorded.
- [x] When the lien is unrecorded.
- [ ] When the purchaser has a security interest.
- [ ] When the court decides in favor.
> **Explanation:** A purchaser may have priority over a tax lien if the lien was unrecorded at the time of purchase, thereby lacking notice of the lien.
### How can a taxpayer avoid a federal tax lien?
- [x] By paying the tax debt in full.
- [ ] By transferring the property to a relative.
- [ ] By ignoring the debt.
- [ ] By disputing the debt without response.
> **Explanation:** A taxpayer can avoid a federal tax lien by paying the tax debt in full, preventing the lien from being assessed and recorded.
Thank you for exploring the priority of tax liens with us. Mastering this knowledge is crucial for professionals navigating the intricacies of taxation and property transactions. Keep expanding your understanding of these pivotal financial concepts!
