Everything You Need to Know About Tax Liens, Pt. 2

In Part 1, you learned what a lien is, how taxpayers are notified of a lien, and what elements are required for a valid lien. In Part 2, you will read how a lien can impact your credit report, who has access to a list of those with liens, and what happens during bankruptcy and other financial events if a lien is involved.

How Liens Impact Your Credit Report

Because liens are a matter of public record, everyone has access to the list of taxpayers who are under a lien. This is how those “tax resolutions companies” find you so quickly once a lien is filed against your property. They purchase lists of publicly filed tax liens and obtain access to all your personal information. Many of the “tax resolution scams” are run by people pretending to be the IRS. They try to extort money out of people by obtaining their primary information from lien filings.

Additionally, all of the major credit-reporting agencies monitor the county recording offices for tax lien information and the information goes on your credit report. Anyone who has ever had a tax lien knows a lien filing can have a significant impact against your credit score. The information stays on your credit report for a minimum of seven years, plus lien filings that have been released after being paid in full continue to remain on your record.

A lien implies the tax debtor is unable to pay a major financial obligation. Tax liens take priority over other security interests, especially in a bankruptcy setting. The taxpayer may have difficulty making major financial purchases, leasing automobiles, buying homes, and even applying for credit cards because of lien related issues.

The Public List of Delinquents

California Revenue and Taxation Code Section 19195 requires both the Franchise Tax Board and the Board of Equalization to publish a list of the top 500 tax debtors in the state. Any taxpayer without a resolution with the state tax agency in question (it cannot be a pending resolution) is subject to public disclosure after being served with the appropriate due process notice.

The most significant consequence of the list, other than the notoriety of being on it, is the ability for California to suspend all your active state licenses, including your driver’s license. If you are placed on the list, the California Department of Motor Vehicles will typically suspend your license within thirty (30) days, making it a crime for you to drive a motor vehicle.

To be included on the list, total tax delinquencies must total more than $100,000 and be subject to a recorded notice of state tax lien. Public disclosure on the list includes:

• Taxpayer name and address
• Amount owed
• Earliest recording date of notice of tax lien
• Taxpayer occupation or professional licenses including type, status, and license number

Liens and Bankruptcy

Tax liabilities can lead to bankruptcy; unfortunately, bankruptcy does not make all tax problems go away; some liens survive the bankruptcy process.

The state tax agencies will allow liabilities to be discharged by bankruptcy, but there are complications. The process has multiple steps that must be taken in the correct order. Businesses that owe taxes must be dissolved during the bankruptcy; therefore, they will be unable to generate any more sales tax liability. No business also means there is no way to generate revenue after the bankruptcy.

State tax liens can also remain against a taxpayer after a bankruptcy. Generally, in chapter 7 cases, a taxpayer can discharge liabilities pursuant to the federal rules. The state tax agencies will not have any collection action taken against the taxpayer to compel payment and will not tax any action against a bankrupt taxpayer.

However, any tax liens that were filed pre-petition would survive the discharge and attach to any property held by the taxpayer from before the petition date. As such, any tax liens that survive the bankruptcy, even if the underlying liability is discharged, will continue to attach to any property that the taxpayer owned pre-petition unless the balance is voluntarily paid, or the property is sold, refinanced, or foreclosed.

State tax liens also trump any homestead exemptions that are claimed by the taxpayer during bankruptcy proceedings, as defined in California CCP 704.910. As such, when a property is sold or foreclosed upon, the state lien tax will get paid first, prior to any claim of homestead exemption.

Transfers of Property Subject to Lien to New Ownership

Taxpayers can technically transfer property that is encumbered by a state tax lien. Despite the passing of the title on the property, often through a quit claim deed or other type of conveyance, the lien will continue to remain in full force against the property until it is satisfied or otherwise discharged.

The lien will not attach to other property that is owned by the new owner, but will continue to affect the property rights of the newly transferred property. The new owner may pay or otherwise satisfy the outstanding liability directly with the state tax agency that filed the lien to clear the property from further encumbrance.

Escrow Transactions and Nominee Liens

Usually during the escrow process, tax liens will prevent a transaction from going through if the lien is not fully satisfied. However, in situations where escrow closes without full and complete satisfaction of the liability, the State of California can file a nominee lien against the purchaser for the amount of the liability.

Alternatively, nominee liens can be filed in cases where the taxpayer has transferred property into the name of another person, corporation, or other entity, particularly when the taxpayer continues to exercise complete control over the subject property.

Automatic Filing of Liens in the Case of Installment Agreement

Liens can be filed in circumstances where an installment agreement is granted, particularly when the taxpayer has a history of non-compliance or non-payment. After all, liens are a security interest protecting the government’s interest. Non-compliance by the taxpayer would cause the government to feel nervous about the taxpayer’s intentions to satisfy the liability.

Tax lines are usually filed in situations where the taxpayer owes more than ten thousand dollars ($10,000) and a lien has not been previously filed. Prior to the filing of any liens, the collection agent will notify the taxpayer of the intent to file a lien to satisfy due process requirements.

Liens have a significant impact on your ability to obtain credit or transfer property. Even when a payment plan has been implemented, a lien may still be filed.

The next post goes into how the California Board of Equalization handles tax liens.