“…in this world nothing can be said to be certain, except death and taxes.” – Benjamin Franklin
The IRS has a wide variety of tools available to collect on tax debts and is certainly not afraid to use them. The tool we commonly come across in the real estate closing and title insurance industry is the Notice of Federal Tax Lien (“NFTL” for short). Don’t be confused; the actual tax lien is the underlying claim and is not the same thing as the Notice of Federal Tax Lien, which protects the government’s priority against third parties and could prevent or delay a closing.
Below are the tips on how to get the deal closing despite a NFTL in the title.
FIRST DETERMINE IF THE LIEN IS STILL ENFORCEABLE
The proper approach for a title agent to take when spotting a NFTL in the chain of title may depend on whether the tax debtor is the buyer or current owner/seller in the real estate transaction. In either scenario, first determine whether the lien is unenforceable due to the lapse in time. The IRS generally has 10 years to collect on a tax lien.
From a title agent’s perspective, you should be looking at the “Last Day for Refiling,” which is listed on the face of the NFTL and is ten days from the date of assessment. Some underwriters take the position that the NFTL is no longer valid one day past that Last Date for Refiling. The letter of the law, however, states that the IRS has 30 days from that Last Day for Refiling before the lien automatically releases. Further, the IRS may refile the NFTL during the one-year period ending 30 days after the “Last Day for Refiling”. IRC § 6323(g)(3)(A). Here’s the summary:
Last Day for Refiling + 30 days + 1 year
If the transaction falls outside of this timeframe, you can disregard the NFTL. But, because this leaves a 395-day grace period for the IRS to keep its priority, the title agent should check with the underwriter for approval to close within the timeframe.
IF THE NFTL IS STILL VALID AND THE TAX DEBTOR IS THE CURRENT OWNER:
If the NFTL in the chain of title is against the current property owner, there are many options available, but all require effort on the part of the property owner.
- RELEASE – The debtor can pay the debt to have the lien released. This is the easiest and cleanest way to ensure that the IRS no longer has the right to levy the subject property. The debtor can also post a bond in exchange for a release. Once conditions are met, the IRS has 30 days to release the lien.
- SUBORDINATION – the IRS may agree to subordinate its claim on this property to the new mortgage. The conditions under which a subordination may be granted are contained in Section 7 of the Application for Subordination Application (Form 14134). For more details, see IRS Publication 784.
- DISCHARGE – the discharge removes the lien obligation from specific property. The conditions under which a discharge may be granted are contained in Section 7 of the Application for Discharge (IRS Form 14135). Some examples include where it is determined that the government’s interest in the property has no value, or where the tax debtor owns other property valued at least two times the amount of their debts (tax debt and other debts). For more details, see IRS Publication 783.
- WITHDRAW – the withdraw does not extinguish the underlying claim that the debtor owes money, but instead, it withdraws the Notice of Tax Lien that puts third parties on notice. When the Notice of Tax Lien is withdrawn, the IRS is effectively removing itself from the competition with other creditors whose debts are secured by the debtor’s property. The withdraw is available in narrow circumstances, such as where the IRS filed the NFTL too early, or if a direct payment on an installment agreement has been set up between the Debtor and the IRS.
MORE OPTIONS ARE AVAILABLE WHEN THE TAX DEBTOR IS THE BUYER
Not only are all of the above available to the tax debtor buyer, but there are two additional ways to close the transaction where the buyer is the tax debtor.
First, if there is no lender involved, the buyer can purchase the property subject to the NFTL with the understanding that the NFTL attaches to the new property. Here, the title agent must list the NFTL as an exception on the owner’s policy. For further liability protection, have the buyer sign an indemnity and hold harmless, stating that they understand the consequences and the exception to the owner’s policy, and that they will indemnity and hold the title agent harmless.
Second, if there is a lender and the mortgage is considered a Purchase Money Mortgage, then the IRS has agreed to automatically subordinate its lien to that mortgage without any further action. The Purchase Money Mortgage secures a loan for the purchase of real or personal property, as opposed to a refinance or construction loan. IRS Publication 785 addresses this scenario in depth. The publication repeats that state law plays a role in whether this option is available to the buyer, and the title agent should make the lender aware and consult with the underwriter on their interpretation of Publication 785 and any additional requirements.