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April 10, 2015

Recent Guidance Affects the IRS' Ability to Issue a Notice of Federal Tax Lien on an Unrecorded Property Conveyance

The tax attorneys at Nardone Law Group in Columbus, Ohio, routinely advise taxpayers who have been contacted by a revenue officer with the Internal Revenue Service. If a taxpayer neglects to make payment of a federal tax liability, the IRS has broad authority and tools available to collect delinquent taxes, which includes the filing of a Notice of Federal Tax Lien. A Notice of Federal Tax Lien can cause a taxpayer significant financial harm, so it is crucial that taxpayers are aware of the various ways to obtain relief when issued a Notice of Federal Tax Lien. See our previous article, Discharging Property from a Notice of Federal Tax Lien, where we focused on the option of discharging property as one of the solutions available to help taxpayers resolve a Notice of Federal Tax Lien.

Recently, the IRS issued interim guidance regarding the government’s ability (or possible inability) to issue a Notice of Federal Tax Lien on an unrecorded property conveyance, frequently arising in divorce cases. This article provides a brief overview of the IRS guidance, as well as some potential issues and questions that may arise as a result.

What Does the Guidance Say?

In September 2014, the IRS issued interim guidance (found here) regarding “policies and procedures for prioritizing the federal tax lien relative to a change in the Service’s position on unrecorded conveyances.” The new procedures are to be incorporated into Internal Revenue Manual 5.17.2.7.1, with the new subsection title of Unrecorded Conveyances.

The IRS guidance provided, in pertinent part:

"A recent court decision has led to a change in the Service’s position relative to unrecorded conveyances. The new position is that a federal tax lien does not attach to property once a conveyance divests a taxpayer of their interest in that property, regardless of what state law provides regarding the rights of creditors in unrecorded conveyance situations."

Essentially, once a property interest has been conveyed from one party to another, the IRS can no longer issue a Notice of Federal Tax Lien on that property interest, against the party that transferred the property, regardless of whether the conveyance was properly recorded. Furthermore, this policy is to take precedence over any contrary state laws.

What Does the Guidance Mean?

This issue of prioritizing a Notice of Federal Tax Lien on an unrecorded conveyance frequently arises in divorce cases, where one of the spouses receives full title to the house. The IRS guidance provided an illustrative example:

A husband and wife divorced in December 2005. The court awarded the residence to the wife with a contingency that, if the wife sells the residence within three years of the divorce, the wife will split the proceeds with the husband.

The husband failed to pay his 2005 taxes, and the IRS filed a Notice of Federal Tax Lien in September 2008. The husband’s contingent property right expired in December 2008, and the wife never recorded the property conveyance in the county deed records. 

Even though the real property conveyance was unrecorded when the Notice of Federal Tax Lien was filed, the lien could only have attached to the husband’s contingent personal property interest in the monetary proceeds, until that right expired. Therefore, since the contingent right expired in December 2008, the Notice of Federal Tax Lien could not attach to a real property interest in the residence.

How will the Guidance Affect Existing Practice?

This guidance has created a fair amount of confusion in the states. Traditionally, state laws played the important role of defining property rights, and state recording statutes are directly relevant to determining priority rights. The IRS guidance, however, expressly disregards state laws in relation to the rights of creditors in unrecorded conveyance situations.

This guidance seems to suggest that the IRS is seeking to protect the innocent spouse, or transferee, from having their rightfully acquired property interest improperly seized by the government. Since it is still unclear how this guidance will affect the IRS’ practices and procedures going forward, it is important for taxpayers to stay updated and informed on the changes as they occur.

Contact Nardone Law Group

Nardone Law Group represents individuals and businesses in federal tax issues, including resolving a Notice of Federal Tax Lien. If you have been contacted by an IRS revenue officer, or have been subjected to a Notice of Federal Tax Lien, contact one of our experienced tax lawyers today. Nardone Law Group’s tax attorneys and professional staff have vast experience representing clients before the IRS. If you are subject to a Federal Tax Lien, we will thoroughly review your case to determine what options and alternatives are available.

Contact us today for a consultation to discuss your case.

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April 10, 2015

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