Sam Brotman, JD, LLM, MBA July 2, 2020 18 min read

The Complete Guide to CDTFA Tax Liens

How the California Department of Tax and Fee Administration Handles Tax Liens

In our continuing series about tax liens, we would like to talk about how the California California Department of Tax and Fee Administration handles them. While there are similarities between how the IRS and the various California tax agencies pursue, impose, and release tax liens, there are some important differences that every taxpayer should be aware of.

Overview of the California Department of Tax and Fee Administration

The California Department of Tax and Fee Administration administers the sales and use tax for the state of California.

Sales tax is imposed on individuals and businesses in exchange for the privilege of selling goods in California. It is measured by subtracting non-taxable sales from the business’s gross receipts. In general, sales tax is passed along to the consumer. A “use tax” is paid by the purchaser on an item obtained for use inside the state from an out-of-state retailer.

The CDTFA acts in two phases: Assessment and Collections.

The Assessment Phase is when the CDTFA will try to assess as many people as possible to increase the number of collection targets.

In the Collections Phase, the CDTFA will send collections officers who often demand large payment amounts from businesses by threatening to place a lien against personal property. Anyone involved with a corporation, whether or not they hold ownership in it, can be held personally liable for the amount of sales tax owed. The CDTFA also has the power to revoke the seller’s permit.

The Process of Placing a Lien

  • The CDTFA invokes a lien against your property
  • The lien encumbers your California property, preventing you from refinancing, selling, or transferring it through escrow
  • The credit bureaus record the lien on your credit record, where it will remain for seven years
  • The CDTFA has the legal right to enforce collections, including bank levies and other asset seizures

How to Remove a Lien

To have a lien removed, you must create a plan that will help you pay off your tax liability. Your first step is to pay as much as possible immediately to minimize interest and penalties. Then determine the most expedient way to discharge the debt and pay any additional penalties.

What your plan should include:

  • A request for the consideration of a short-term (less than 12 months) or long-term (12 months or more) payment proposal
  • Filing current tax returns and prepayments on time
  • Presenting a complete financial statement and formal request for payment plan
  • Making payments on time and in full each period

Be diligent about making all installment plan payments on time and in full. An installment agreement can be terminated due to:

  • Late payments
  • Delinquent or partial payments
  • Failure to disclose assets or income on the financial statement
  • Failure to increase payment levels as requested on new assets or income
  • Failure to comply with a review of financial status

The CDTFA provides a lot of flexibility in payments. You can pay online, by credit card and through automatic withdrawal. Interest will continue to accrue until the debt is paid off.

Disputing a Lien

You can dispute a lien if you feel it has been placed in error. To dispute a lien, communicate with the CDTFA as soon as possible by phoning or writing to the CDTFA office that sent the bill, or by visiting the nearest CDTFA office.

Consequences of Non-Payment of Taxes

The consequences of neglecting to pay taxes either by the filing date or through an installment plan can be devastating. The California Department of Tax and Fee Administration is allowed to do the following:

  • Encumber California property
  • Place bank levies and seize other assets
  • Intercept your state tax refund
  • Issue a civil warrant (”till-tap” or “keeper” warrant) allowing the California Highway Patrol or local sheriff to enter your business and collect the gross receipts or contents of the cash register (till-tap). A keeper warrant allows a representative to remain at the business for one to 10 days to continue to collect proceeds.

How to Have a Lien Released

To have a lien released and remove the encumbrance on your properties and bank accounts, you must pursue one of these actions.

  • Pay your taxes in full: You must submit payment for the entire tax debt plus interest and other charges. Then, the taxing jurisdiction sets the bill balance to zero.
  • Partial Release: You can obtain the partial release of a tax lien on a specific piece of property if the amount of taxes and penalties due is secured by other property under lien.
  • Request Relief: Contact the CDTFA as soon as possible. File all past due returns, even if you cannot pay. Pay as much as possible to avoid additional interest. If you have already paid your tax debt, you may be eligible for relief from the penalty, interest or fees.
  • Offer in Compromise: Request to pay less than the amount due so you can settle liabilities that cannot be paid in full due to a specific set of circumstances.

You may be eligible for an Offer in Compromise for if you meet all of the following criteria:

  • You have a final tax or fee liability on a closed account
  • You are no longer associated with the business that incurred the liability
  • You do not dispute the amount of tax or fee you owe
  • You cannot pay the full amount you owe in a reasonable amount of time

The California Department of Tax and Fee Administration is empowered to place a lien on personal property for the non-payment of sales and use tax. If you are a retailer within the state of California or if you purchase goods from outside the state, you must file and pay the appropriate taxes on all items sold.

If the CDTFA places a lien on your property because you paid no or partial taxes, you can get it released by paying your taxes and penalties in full through an installment payment program or by requesting relief or Offer in Compromise. The help of an experienced tax attorney can expedite the matter.

The CDTFA and California Tax Liens

The consequences of falling behind on your taxes are difficult for anyone, but when we are talking about businesses, sales taxes, and California’s California Department of Tax and Fee Administration (CDTFA), the results can be devastating. 

The CDTFA is particularly aggressive about investigating and pursuing unpaid sales taxes, and will often demand immediate payment of any liability, no matter what other types of financial responsibilities or consequences the business may be facing. One of the most powerful “weapons” in the CDTFA’s arsenal of collection tactics is the tax lien. Understanding how liens work, why they happen, and what to do if one is recorded against you is important in order to protect your business during times of financial difficulty.

What You Need to Know About Tax Liens

Once the CDTFA has determined that you owe unpaid sales tax, they will begin collection processes. One of the most unpleasant collection actions available to the CDTFA is the tax lien. In essence, a tax lien is a public notice which states that the CDTFA has a legal claim to your personal or real property until your tax debt is paid. 

This lien encumbers your property, and means that you cannot sell, refinance, or transfer the property through escrow. If you obtain new property after the lien is recorded, it automatically attaches to that property as well.

Recorded liens are public records, viewable by anyone, including credit bureaus, and their effect on your credit rating can be immediate and disastrous. Even if the lien is eventually released, it will remain on your credit reports for seven years, unless the lien was originally filed in error. 

If a state sales tax lien is recorded against you before you file for bankruptcy, the lien will remain even if the tax debt is discharged in the bankruptcy. California state tax liens have a 10-year lifespan. After 10 years, the lien expires and is unenforceable, however it can be renewed for another 10 years if the CDTFA files extension paperwork within 90 days of the expiration date. This renewal can be filed twice, for a total lifespan of 30 years.

 

The Process

The tax lien process effectively begins with a notice from the CDTFA, which they must send you 30 days before they intend to file the lien with the county recorder. If you receive such a notice, you must act quickly. If you believe that the CDTFA has committed an error, you should contact them immediately, preferably after consulting with a qualified tax attorney to ensure that your rights are protected.

If you do actually owe the CDTFA the amount they claim, it is in your best interest to pay the debt in full, as soon as possible. The faster you pay, the smaller the total amount of taxes, penalties, interest and other fees will be. If you pay within the 30 day period, you should be able to avoid having a lien recorded at all.

Unfortunately for many taxpayers, the difficult financial circumstances that led to the tax debt in the first place often make it impossible to pay the entire debt immediately. While this situation understandably adds a lot of stress, it does not mean that a lien is inevitable. If you make contact with the CDTFA within the 30 days to pay what you can and to discuss a payment plan, you may still be able to avoid the recording of the lien.

The CDTFA may withhold a lien if it believes that the taxpayer can and will make payment arrangements in good faith. Short term payment plans are sometimes accepted. The CDTFA will usually withhold a lien if you can pay the full amount within 12 months, if you have never had payment problems before, and if you fulfill the terms of the plan perfectly. 

Payments are usually made weekly, and all of your tax returns and filings must be kept up-to-date. Longer term payment plans are more difficult to arrange and will require a thorough investigation into your finances to ensure that you do not have the means to pay off the debt more quickly.

Releasing the Lien

If you have been unable to reach an arrangement with the CDTFA and they have recorded a lien against you, all is not lost. It is possible to have the lien released. While the damage to your credit report has been done, releasing the lien is the first step to rebuilding your financial life.

The first and most obvious way to release the lien is to make payment in full, including any interest, fees, and penalties. It is also possible to request a partial release of the lien if there is a need to sell or transfer a specific piece of property and there are insufficient funds or equity to satisfy the tax debt, or when the party with the lien does not actually have any rights to the title of the property. 

To request a partial release of a lien, you must provide the CDTFA with a variety of documents outlining the need for a partial release and evidence of the proposed disbursements to both seller and buyer. If the partial release is granted, the lien will remain in effect on all other property.

The other way to release a lien is to have your balance set to zero by the CDTFA. This may be possible by requesting relief.  In some circumstances, you may be eligible to make an Offer in Compromise, where you settle with the CDTFA for an amount less than what you owe, but as much as they believe you can reasonably pay. 

The rules around the CDTFA Offer in Compromise program are very strict and only apply to businesses which have been closed. If you were the spouse or domestic partner of a taxpayer with a lien against them and have ended your relationship, you may be able to apply for “innocent spouse or domestic partner relief.”

Once a lien is released, the CDTFA will issue a Release of the Notice of State Tax Lien to the County office where the lien was recorded. You can also request that copies of the lien release be sent to yourself, title companies or escrow agents.

No matter where you may be in the tax lien process, you should seriously consider getting expert advice from a tax professional. Because of the size and power of the California Department of Tax and Fee Administration, many taxpayers feel helpless to advocate for their rights, or confused about the intricacies of California sales tax law. 

A qualified tax attorney is a powerful ally in any dispute with the CDTFA. Their familiarity with the law and with CDTFA rules and regulations can help you smooth the way to resolution, and help remove some of the stress from a difficult situation.

As with all tax matters, the most important thing you can do is to face the situation straight on with the best information and advice available.

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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