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
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