When a person neglects or refuses to pay their tax debt, the IRS can obtain a lien on the tax payer’s property. The federal tax lien attaches to every interest in property that the taxpayer has or acquires during the time of the lien in effect. The IRS obtains the perfected security interest in the person’s property by filing a Notice of Federal Tax Lien with the county recorder’s office. The lien remains in effect until it is satisfied or becomes unenforceable by the lapse of time.
Discharging IRS Tax Debt
IRS tax debt can be discharged in a bankruptcy if the taxes meet the requirements to be discharged (filed more than 3 years prior to the date of the bankruptcy petition and taxes were assessed for at least 240 days as of the petition date). Generally, a valid pre-petition lien survives bankruptcy even if the obligation that was the basis for the lien is a dischargeable obligation.
How a Tax Lean Benefits the IRS
Without a lien, the IRS would have only an unsecured claim against the taxpayer’s estate. The underlying unsecured tax obligation would be discharged in bankruptcy, but the claim would entitle the IRS to participate in distribution of estate assets, if any. By obtaining a tax lien the IRS has acquired additional rights, the IRS has become a secured creditor.
The bankruptcy discharge precludes the IRS from taking any action to collect the debt as a personal liability of the debtor. But when the IRS obtained its tax lien, IT obtained rights against the liened property to secure payment of the tax obligations. Because a lien holder retains the ability to enforce pre-petition dischargeable obligations against the liened property, even after bankruptcy discharge, the debtor's obligation survives the discharge to the extent it is secured by the liened property.
Consequently, a tax obligation is enforceable after discharge if the IRS has secured the obligation to the liened property.
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The bankruptcy can discharge a debtor’s personal liability for the tax obligations, however the lien itself will not be extinguished by the bankruptcy discharge. The IRS will still have a valid lien again the debtor’s property. Contact the attorneys at Kain and Scott and see us at www.kainscott.com. You will be glad you did!