Can the IRS Do That? The Statutory (or Secret) Tax Lien

In re Rios, 649 B.R. 30 (Bkrtcy. E.D. Wis. 2023) involves the IRS “secret” or “statutory lien” under Internal Revenue Code section 6321, which attaches to “all property and rights to property” of the debtors. IRS does not need a Notice of Federal Tax Lien to have right to receive an interest in debtor’s property.

Issue:

Whether the Internal Revenue Service is entitled to relief from the automatic stay based on a lack of adequate protection of its alleged interest in the Debtors’ Social Security benefits.

Facts:

The Debtors Chapter 13 case owe federal taxes dating back to 2005. According to the IRS’s proof of claim, the Debtors owe the IRS a total of $260,611.60 for their past due federal taxes.

The IRS offered the following breakdown of its claim: a secured claim in the amount of $220,204.28, an unsecured priority claim in the amount of $31,805.45, and a general unsecured claim in the amount of $8,601.87. The IRS has acknowledged that it did not file a notice of federal tax lien covering the taxes at issue.

The IRS sought relief from the automatic stay to implement its right of setoff and/or to enforce its statutory liens on the Debtors’ Social Security benefits.

Holding:

The automatic stay of 11 U.S.C. § 362(a) is modified to permit the Internal Revenue Service to enforce its federal tax liens securing tax liabilities for tax periods 2005 and 2008 through 2012 on the Debtors’ right to Social Security benefits in accordance with applicable nonbankruptcy law.

Take Away:

This case is about the IRS statutory lien, which arises by operation of law after notice and demand for payment.  There is a difference between the statutory lien, and the Notice of Federal Tax Lien because there is no recording.  The IRS records a Notice of Federal Tax Lien to obtain priority over other creditors. A lot of taxpayers get confused and believe that the IRS has no lien against their assets because noting is recorded.  However, there is still the statutory or assessment lien, which gives the Government the full power to take collection action. Once a lien is in place, generally there are only two ways to remove it — (a) full payment or (b) expiration of the 10-year collection statute of limitations.