A federal tax lien arises automatically when a taxpayer neglects or refuses to pay a tax liability after the IRS has assessed the tax and issued a demand for payment. The lien attaches to all current and future property and rights to property of the taxpayer.
How a lien arises: 1. IRS assesses the tax (after return is filed or audited). 2. IRS sends a Notice and Demand for Payment. 3. Taxpayer neglects or refuses to pay within 10 days. 4. Lien arises automatically — no further IRS action required.
Notice of Federal Tax Lien (NFTL): - To be valid against third parties (creditors, purchasers), the IRS must file an NFTL in the appropriate public office. - Filing makes the lien public and puts other creditors on notice. - Triggers CDP rights (taxpayer can request a hearing within 5 business days).
Priority rule: "First in time, first in right." A filed NFTL generally has priority over subsequent creditors, but certain superpriorities exist (purchasers for value, mechanics' lien holders, etc.).
Lien releases: - Liability paid in full. - Lien becomes legally unenforceable (statute expires). - Bond accepted. - OIC accepted.
Lien subordination: IRS agrees to move its lien to a subordinate position to allow refinancing or a sale that will yield proceeds to pay the tax.
Lien vs. Levy: - Lien: A legal claim on property (secures the debt, doesn't take the property). - Levy: The actual seizure of property to satisfy the debt.
> Exam tip: The lien arises automatically when tax isn't paid — but the NFTL must be filed publicly for the lien to be effective against third parties. Know the lien-levy distinction: lien is a claim; levy is actual seizure.