It is never a good moment when one spouse discovers that the other has not paid taxes on a jointly filed federal tax return. Most taxpayers can and do recognize that dreaded IRS envelope even from a great distance, and when there are taxes due on a jointly filed return, the IRS addresses their letters to both taxpayers on the return at the same address. Often, particularly in a divorce situation, the spouse who has not paid simply gets to the mailbox first and the other spouse is never made aware of the IRS letter.
Eventually, if the federal tax is left unpaid, the IRS will file a Federal Tax Lien. Prior to filing that lien, the IRS will send a certified letter to each spouse. They will also send a copy of the lien once it has been filed. During a divorce, it is not unusual for a judge to rule that one party is responsible for paying those unpaid taxes, but the IRS not being a party to that action is not bound by the judge’s ruling. A judge’s ruling doesn’t mean that other spouse will pay those taxes – after all, they didn’t pay them before.
Dealing with Federal Tax Liens is not an easy task. The Federal Tax Lien is filed in the county where the Taxpayers’ real property is located. Multiple liens can be filed for the same unpaid taxes in different counties and states. The Federal Tax Lien operates as a lien on both personal property and real property. The effect on personal property is limited and there is no action against a purchaser in the ordinary course of business (US v. Sullivan, 333 F2d 100, 116 (3d Cir. 1964) or a banker, regardless of the fact they knew of the tax lien, Rev. Rul. 67-162, 1967-1 CB 356. In the case of real property, the lien must be satisfied before the property can be sold or paid from the proceeds of the sale.
A Federal Tax Lien is valid for 10 years from the filing date and may be refiled to extend it for another 10 years. If real property is to be sold and the lien cannot be satisfied from the sale proceeds, then the IRS has a process that will allow them to release the lien to that property only. This procedure normally takes 60 days, and approval is hard to obtain. If there is a judicial sale of the property such as in foreclosure then the purchaser will take the property free and clear of the IRS lien, but that does not affect the validity of the lien itself.
Things get further complicated when a spouse who is found not liable for the taxes is awarded the marital residence. Once the IRS starts foreclosure proceedings, choices other than paying off the tax lien are limited. Hopefully, the spouse who has been awarded the house has taken other steps, such as filing for innocent spouse relief (see IRS publication 971) or applying for an offer in compromise and has the ability to pay.
If the taxpayer who is granted innocent spouse relief gets an offer in compromise and has the ability to pay, the tax lien will be released to that individual only – not the other spouse. The result is that jointly held property is transferred to one spouse pursuant to a property settlement and there is a Federal Tax lien on file prior to the transfer. The interest formerly held by the former spouse is still subject to the Federal Tax Lien. The IRS can and will bring an action to foreclose the lien on the house and will give the other spouse half the sale proceeds. IRS foreclosures are brought in Federal Court, which is an extremely expensive place to contest a foreclosure. It frequently is possible for the spouse who received the property to buy the interest which is subject to the Federal Tax Lien from the IRS and avoid foreclosure.
An IRS lien will also attach to after-acquired property. While a purchase money mortgage will always take priority over a Federal Tax Lien, Rev. Rul. 68-57, 1968-1 CB 553, that is little consolation to an ex-spouse who has acquired a new home. If an ex-spouse believes that their former, liable spouse is not resolving the issue of the Federal Tax Lien, they may want to be proactive in their actions and consult with an attorney knowledgeable in this area of law to determine how to best proceed. The attorneys of Doerner, Saunders, Daniel & Anderson, LLP are available to assist you if you are involved in a case concerning federal tax liens during your divorce. Contact us at 918-582-1211 to set up an initial consultation.
Doerner, Saunders, Daniel & Anderson, LLP provides this content for informational purposes only. It is not intended to provide legal or other professional advice nor does the transmission of this information create an attorney-client relationship between any attorney of the Firm and the reader. If you seek legal advice or assistance, please consult with a competent attorney familiar with the applicable laws. If you wish to initiate possible representation by an attorney with this Firm, please call the attorney of your choice. You will be advised of our processes to avoid conflicts of interest and requirements of our letter of engagement prior to the commencement of representation.
