Final Regulations Issued on Validity, Priority of Federal Tax Liens

On April 4, the IRS published final regulations (T.D. 9520) that govern the validity and priority of federal tax liens under Sec. 6323.

Under Sec. 6321, the federal government has an automatic lien against any person who does not pay federal tax for which they are liable after the government demands payment. This lien extends to all that person’s property and rights to property. Sec. 6323 provides that a federal tax lien is only valid against certain persons if a notice of federal tax lien (NFTL) is filed; that section also generally addresses the validity and priority of federal tax liens.

Numerous amendments to Sec. 6323 have been made since 1976 but until now have not been reflected in the regulations. The final regulations published on Monday reflect these changes to the law.

One issue the regulations deal with is that most NFTLs have contained a certificate of release that automatically becomes effective on a date prescribed in the NFTL. This meant that the IRS had to timely refile an NFTL that contained a certificate of release in each jurisdiction where it was originally filed, or the lien would self-release and be extinguished in all jurisdictions. The final regulations change this to provide that the government’s failure to timely refile the NFTL or the release of the lien will not “alter or impair any right of the United States to property or its proceeds that is the subject of a levy or judicial proceeding commenced prior to the end of the refiling period or the release of the lien, except to the extent that a person acquires an interest in the property for adequate consideration after the commencement of the proceeding and does not have notice of, and is not bound by, the outcome of the proceeding” (Regs. Sec. 301.6323(g)-1(3)(i)).

The regulations also specify that a federal tax lien will not be valid against purchasers of personal property sold in a “casual sale” for less than $1,380 (for 2010 and to be indexed for inflation thereafter). The property subject to this provision includes household goods and various personal effects. The regulations also specify that a federal tax lien will not supersede a valid mechanic’s lien against a personal residence in certain cases.

The final regulations are effective April 4, 2011.