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7. Federal Tax Liens

Tax debts can become "secured" debts if the taxing authority takes the steps necessary to obtain a lien against the taxpayer’s property before he files for bankruptcy. If the taxing authority obtains a pre-bankruptcy tax lien, the attachment of the lien can drastically impair a taxpayer’s ability to avoid payment of the tax through a bankruptcy filing.

7.1. Federal Tax Liens – Attachment of Lien. To obtain a federal tax lien valid in bankruptcy, IRS must file a "Notice of Federal Tax Lien" in the real property records of the Texas county clerk before the taxpayer files for bankruptcy.        Index

7.1.1. Real Property (Land & Improvements). To assert a valid tax lien against real property (land and improvements to land), IRS must file the tax lien notice in the county where the land is located.        Index

7.1.2. Personal Property. To assert a valid tax lien against personal property (everything other than land and improvements to land), IRS must file the tax lien notice in the county where the taxpayer resides on the date the tax lien notice is filed. It is irrelevant whether the property is located in a county different from the taxpayer’s residence or whether the taxpayer moves to a different county after IRS files the tax lien notice. If the tax lien is properly secured, the taxpayer can not defeat the lien by moving his residence or property to a different county.         Index

7.2. Property Exempt from Federal Tax Collection. Pursuant to IRC § 6334, the following property is the only property that is exempt from a federal tax levy (i.e. can not be taken to satisfy a federal tax debt):        Index

7.2.1. wearing apparel and school books;

7.2.2. fuel, provisions, household furniture, personal effects, arms (guns) for personal use, livestock, and poultry (maximum value – $6,250);

7.2.3. books and tools of a trade (maximum value – $3,125);

7.2.4. unemployment benefits;

7.2.5. undelivered mail;

7.2.6. railroad workers and U.S. Armed Services annuity and pension benefits (other retirement plans not covered);

7.2.7. workmen's compensation benefits;

7.2.8. wages in the following amounts;        Index

(a) amounts required to pay court ordered child support; plus;

(b) the standard tax deduction ($6,300 in 2015) plus the number of personal tax exemptions allowed ($4,000 per exemption in 2015). For an individual, the amount in 2015 would be $858.33 per month ($6,300 + $4,000 divided by 12);

7.2.9. service-connected disability benefit (as defined by 38 U.S. Code 101(16);

7.2.10. public assistance benefits under the payments. the Social Security Act, or state welfare programs;        Index

7.2.11. Job Training Partnership Act payments;

7.2.12. residences in cases where the amount of the levy does not exceed $5,000.

Federal tax liens are not subject to a taxpayer’s federal or state exemptions. In other words, except for the property listed above, a federal tax lien, if properly filed, will attach to all of the taxpayer’s property, even property that would be exempt from seizure for other debts under federal or state law. The filing of a bankruptcy case will not change that result, although IRS is usually never interested in taking essentially worthless personal property. After the bankruptcy court enters a discharge order, IRS will normally release a federal tax lien if the taxpayer owns nothing more than household furniture, clothing or other personal property of insignificant value.        Index

Example #7.1. Taxpayer owes $65,000 of federal income taxes for the 2010 tax year. He files his 2010 federal income tax return prior on or before the April 15, 2011 deadline. Taxpayer owns and resides at a home valued at $100,000 located in Harris County, Texas. On December 15, 2013, IRS files a "Notice of Federal Tax Lien" with the Harris County Clerk. Under both federal and Texas state exemption laws, the home would normally be completely exempt from seizure in bankruptcy. If Taxpayer files for bankruptcy on or after April 16, 2014, his personal liability for the 2010 taxes will be discharged. However, the tax lien will survive the bankruptcy. IRS can sell the home to satisfy the tax debt. Taxpayer will also not be able to sell the home free and clear of the lien. The bankruptcy filing will only help the taxpayer avoid payment of the tax debt if he is willing to walk away from (abandon) the home.

3. Pre-Bankruptcy Liens Survive Bankruptcy. A tax lien will continue to exist after the entry of a bankruptcy discharge with respect to all property the taxpayer owns on the date he files for bankruptcy. Although the tax lien survives bankruptcy, the taxpayer’s personal liability to pay the tax will be released if all other requirements for a bankruptcy discharge are satisfied. This means that after the entry of a discharge order, the taxing authority can never collect the tax as a personal obligation of the taxpayer, but can pursue collection by seizing and selling any property the taxpayer owned on the date he filed for bankruptcy.        Index

4. Tax Liens Do Not Attach to Post Petition Property. Tax liens do not attach to property acquired by a taxpayer after he files for bankruptcy, unless he acquires the property with funds or property he owned before filing for bankruptcy. In other words, if the tax debt is dis­charge­able, and the taxpayer acquires any property after he files bankruptcy, with funds earned after the bankruptcy filing, the taxing authority will not be able to seize and sell the post petition property to pay the tax. For this reason, a tax lien will not affect a taxpayer with few assets on the day he files for bankruptcy.        Index


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