In the movie Animal House, Dean Vernon Wormer puts the Delta House on “double secret probation!” That’s funny, but it is no joking matter when a taxpayer discovers that the Internal Revenue Service has put a “secret lien” on his property. Section 6321 imposes an automatic federal lien on “all property and rights to property, whether real or personal, belonging” to the taxpayer when a tax assessment is made and continues until either the taxpayer’s liability is satisfied or the statute of limitations on collection expires. The lien attaches to the taxpayer’s property and to his rights to the property as of the moment of assessment and, once filed, attaches to any after-acquired property. Glass City Bank v. United States, 326 U.S. 265 (1945). In essence, the IRS steps into the shoes of the taxpayer and assumes his legal rights.
Because there is no notice requirement for this lien, it is often called a “secret lien.” This secret lien applies to any interest in the taxpayer’s property, real estate (like a home) or personal property (like an automobile). The property cannot be sold or refinanced without first paying the IRS. Section 522(c)(2)(B) of the Bankruptcy Code provides that even if the tax is discharged in bankruptcy, the tax lien survives. Fortunately, the Bankruptcy Code prohibits collection on the debt from property that is determined exempt during the bankruptcy, except “a tax lien, notice of which is properly filed.” In some cases a filed tax lien filed against real estate may also be avoided during bankruptcy.
The secret tax lien is collectible for ten years after the date of assessment and attaches to all property acquired by the taxpayer for the ten year period after the assessment. This is the case despite the tax’s discharge during a bankruptcy case. Consequently, if a bankruptcy debtor discharges a tax debt, it is important to determine when the ten year statute of limitations on the tax lien expires. Only then can he acquire property that is free from the reach of the IRS. The IRS is able to renew the tax lien, but this is extremely rare.
The safest way to avoid this secret lien situation is to file bankruptcy before the IRS files a tax lien. The automatic stay that goes into effect upon filing for bankruptcy will prevent the IRS from filing a tax lien.
If you owe income taxes and are facing a federal tax lien, speak with an experienced bankruptcy attorney and discuss your options. You may be able to eliminate tax penalties and pay the debt through a Chapter 13 bankruptcy, or completely discharge the tax debt. However, there are many considerations when dealing with a tax debt, so you need the assistance of a qualified attorney.