A federal tax lien is a very powerful weapon in the arsenal of the IRS for the collection of tax. The IRS is granted a statutory tax lien from the date of assessment of tax[1] once the IRS demands payment and the taxpayer fails to make payment.[2] The tax lien is generally not valid against previous purchasers, holders of security interests and others until the IRS files a Notice of Federal Tax Lien in real estate records to give public notice of its lien.[3] IRS tax liens generally follow the rule of: first in time is first in right.
However, the 9th Circuit Court of Appeals was recently faced with the question of whether the IRS federal tax lien take priority over a senior lien if that lienholder knew at the time it obtained the lien that the property owner had unpaid taxes which would give the IRS the right to file a lien in the future.
This question was recently addressed by the Ninth Circuit Court of Appeals in United States v. Allahyari.[4] In Allahyari, the property owner/taxpayer granted a lien to the lienholder to secure previous loans. The property owner and lienholder discussed the property owner’s unpaid taxes and the parties proceeded with the lien despite knowing that the IRS may well file a Notice of Federal Tax Lien in the future for the unpaid income tax. The federal district court ruled that this actual knowledge of the IRS’s right to claim a lien precluded the lienholder from having priority over the IRS Notice of Federal Tax Lien that was later filed.
The 9th Circuit Court reversed the district court and ruled that IRC § 6323(a) protects a security interest acquired with or without knowledge of unfiled taxes or unpaid taxes that may later give rise to a Notice of Federal Tax Lien. Therefore, the senior lienholder who knew of the property owner’s unpaid federal income tax and that the IRS could claim a tax lien does not lose lien priority due to the knowledge that the IRS could file a lien.According to the 9th Circuit, federal law governs the priority of competing liens, and
IRC § 6323(a) protects pre-existing lienholders who obtain their lien before the IRS files Notice of Federal Tax Lien.
Practice Pointer: A person may take a security interest in property even if the holder of that security interest knows the property owner has unfiled tax returns or unpaid tax, provided the IRS has not yet filed a Notice of Federal Tax Lien.
Taxpayers and those who deal with them may contact Jared Le Fevre to discuss the effects of tax liens and how tax liens may affect property transactions.
Jared M. Le Fevre is a tax attorney and partner in the Tax, Trusts and Estates Practice Group of Crowley Fleck PLLP. Mr. Le Fevre represents taxpayers before the IRS, IRS Independent Office of Appeals, Tax Court, Federal District Court and state tax agencies throughout Montana, Wyoming, North Dakota, Idaho, and Utah. Mr. Le Fevre is involved in federal and state and local tax audits, appeals, and tax resolution throughout these western states. Mr. Le Fevre also advises clients on the tax effects of business and real estate transactions.
[1] IRC § 6322.
[2] IRC § 6321.
[3] IRC 6323(a)
[4] No. 18-35956, 2020 WL 6687436, at *5 (9th Cir. Nov. 13, 2020)