The Legal Play Blog

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Federal tax liens are a product of the Internal Revenue Service (IRS). Federal tax liens are created and filed in the property records by the IRS when a taxpayer owes the IRS money that the taxpayer hasn’t paid. If you have ever had a federal tax lien against your property, you may wonder if the IRS can foreclose on your property. By understanding how a federal tax lien works, it can equip you to avoid foreclosure or know how to handle it. However, in full disclosure, dealing with a federal tax lien can get messy quickly, which is why the majority of individuals or companies facing this situation turn to successful attorneys for guidance and representation.

Suffice it to say, you do not want a federal tax lien against you. It is the first thing that hits the public record, so creditors and credit reporting agencies will know there is a federal tax lien. A federal tax lien is filed in the county in which the debtor has property and theoretically puts a lien on all the property, real or otherwise, the debtor has in that county. For these reasons and so many more, federal tax liens should always be taken seriously.

Although federal liens are attached to everything a taxpayer owns within that county, there may be some wiggle room. A homeowner with a lien may still be able to sell furniture, such as a couch, to their neighbor without interference from the IRS. However, if a factory with a lien is selling expensive equipment worth millions of dollars, the IRS could come after that equipment and leave the buyer empty handed.

What Happens When a Federal Lien Is Issued on Property with an Existing Mortgage?

In the event that the IRS has a federal tax lien against a house with an outstanding mortgage, the question becomes which is superior? The tax lien or the mortgage? In general, most states have a first come, first serve rule which means that if the mortgage is in existence prior to filing the tax lien (i.e. the deed of trust in favor of the mortgage lender is filed in the public record before the federal tax lien), the mortgage will most likely be superior.

However, it would be a mistake to think that the IRS cannot do anything if there is a current mortgage on the house. For example, if there is a house with an existing mortgage and a federal tax lien is filed, the IRS can still foreclose. A foreclosure requires the IRS to go through some procedural hurdles first, which typically makes this process uncommon, but it can happen.

The Steps the Government Takes to Follow Through with a Foreclosure

For the government to foreclose on a property, there is a procedure they must follow which can generally look like the following:

• The government gives notice by sending intent letters to the taxpayer
• If the taxpayer does not provide a satisfactory answer or any answer at all, then the IRS will do a public notification. This is most often done with commercial property and office buildings, but it may also be done with a house.
• The IRS will prepare to sell their interest in your house, which means they will foreclose on the property if you do nothing to stop them.
• Foreclosure means the IRS will conduct the sale of the property and issue a special kind of deed.

In most cases, the IRS applies the eighty percent rule, which means they are looking to get eighty percent of the value of the house. So, if you have a $300,000 house, $240,000 mortgage and a $60,000 tax lien on it, there is not enough equity.

Right of Redemption

The taxpayer has a right of redemption which can be a specific number of months for the taxpayer to come up with the funds to pay the amount the property sold for, plus a redemption premium, which can be somewhere around twenty percent.

For instance, if a buyer at a foreclosure auction bids $100,000 for the property, the buyer’s right to possess the property isn’t final. There is a window of time in which the taxpayer has an opportunity to redeem the property. The taxpayer would have to pay the buyer $120,000 and then they could redeem the property. If the taxpayer can’t or chooses not to do this, the taxpayer must surrender the property. The buyer would then be the new property owner. Remember, though, there is a mortgage still in place. So, the buyer would own the house, subject to the first mortgage, meaning if they want to keep the house, the buyer would need to make the necessary payments to the mortgage company.

It is worth noting that although mortgage companies do not have to be notified of the property foreclosure sale, most sophisticated mortgage companies and banks have people whose sole job is to look for these federal notices and match them up with properties that are secured by a loan from them. In other words, even if you do not notify the mortgage company about a federal tax lien or IRS foreclosure, they will most likely find out anyway.

Perhaps even more problematic is that the mortgage company can decide that if a federal tax lien goes into place, they can start their own foreclosure. This is because most deeds-of-trust say that an additional lien on the property constitutes a default on the first lien mortgage, freeing the deed-of-trust holder to foreclose on the property. It can get quite complicated quickly, which is why enlisting the help of an attorney can be key to success in cases like these.

 

Ways to Keep the IRS from Foreclosing on a Federal Tax Lien

There are two primary ways to keep the IRS from foreclosing on a federal tax lien, and they are:

1. Pay the lien.
2. Enter into some sort of installment program or offer in compromise. This can happen while the tax lien is in place.

Limited Life Span of a Federal Tax Lien

The fact is that federal tax liens have a ten-year life during which the IRS can collect the debt or reduce it to judgment. To reduce a lien to a judgment means filing in a court with proper jurisdiction and getting a court to issue a judgement against the taxpayer. This comes with its own administrative burdens and costs that the IRS will decide may or may not be worth doing.

The statute of limitation (the 10-year life of the lien) could help some individuals in the long run. There have been cases where taxpayer has simply waited out the ten-year life of the lien and then the IRS released it. Typically, if you owe the IRS a couple hundred thousand dollars and the IRS chooses not to foreclose on their tax lien, you may be able to wait out the ten-year period without much of an issue. However, during that time, you will not be able to sell or refinance the house.

Generally, if the individual is current on payments and taxes, and the mortgage company gets all the required information, most banks are content to do nothing and simply accept their monthly repayment. Yet, if you have a federal tax lien and are behind on payments, the mortgage lender may choose to be strict simply because the risk is now greater.

 

In short, the IRS can foreclose on your property, but by understanding a federal tax lien you are taking steps toward preventing that from happening, or at the very least knowing what to expect if it does become a reality. Whichever situation you find yourself in, enlist the help of a reputable tax attorney to make sure your rights are protected and that the actions you take best serve your interests.

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Bankruptcy is something the public hears about often. Most of the time, the news and media focus on big corporations or well-known wealthy individuals. Sometimes it may seem that certain corporations or individuals survive, and maybe even thrive after bankruptcy. It is not true that people or businesses can get richer through bankruptcy. Filing bankruptcy is, in fact, a serious issue.

Determining whether filing bankruptcy is the right move for you or your business is critical before moving forward. Bankruptcy is intended to be an option provided by the government to help people and businesses that are struggling to overcome large debt, but depending on the specific circumstances, bankruptcy is not for everyone.

From the moment you are even considering bankruptcy for yourself or your business, it is strongly suggested to make an appointment with a bankruptcy attorney for advisement of the right steps to take, when to take them, and what to expect.

Why Bankruptcy Exists

Bankruptcy is designed for people and businesses that are in debt to too many creditors and just cannot pay everybody. The underlying policy for bankruptcy is helping the debtor settle some, if not all of their debt in an organized fashion, attempting to ensure that most of the creditors with valid claims get something back.

For example, let’s say a debtor has several creditors. Some of these creditors could be suppliers or vendors, government taxing authorities, contract laborers or service individuals. It is not uncommon to have outstanding debt with multiple entities simply because cash-flow was not good enough to pay off everyone and the debtor prioritized some over others for whatever reason. Without bankruptcy, all creditors would likely be pursuing the debtor with their own resources and remedies, and the debtor would have to deal with each of them separately. This is a daunting task. And in some cases, the most aggressive creditors aren’t the ones that have superior right to be first-in-line to be repaid. Preferential treatment of one creditor over the other can have some long-lasting negative consequences. Instead, bankruptcy court offers an organized manner whereby the debtor and all the creditors must join together to figure things out.

The Potential Upside of Declaring Bankruptcy

While declaring bankruptcy for yourself or your business is not for everyone, there are some reasons why people tend to think it has an upside:

• Automatic stay. In bankruptcy there is something called an automatic stay. When a debtor files bankruptcy, the court will bar creditors from any further collection actions until the court eventually approves them doing so.
• Some people see a big financial mogul in the public eye that has filed bankruptcy and appears to still be doing really well with both money and even high public opinion. Individuals wonder why that person is still rich and having their image on the front of magazine covers. As glorified as some famous people make bankruptcy seem, the main thing to note is that bankruptcy is a cumbersome, expensive and stressful process. A lot of personal and financial information is shared with the court and the parties involved. And, ultimately, the debtor’s creditors still get paid something. So no matter how the media may spin it, no debtor in bankruptcy gets off scot-free.
• Immunity Toward Future Wages. When a person declares bankruptcy, it protects that person’s future wages. In other words, if I am quite talented and have the potential to earn a good wage, but I have current debts I can’t pay, I can file bankruptcy and use my current assets to pay creditors. Once my bankruptcy case is discharged, I can then go on to earn more money without having to promise those future wages to any of the previous creditors. This aspect of bankruptcy is important, because without it, productive members of society would not have incentive to continue working because their efforts would be just for the purpose of paying their creditors without having anything in it for themselves.

Can I get Rich by Filing Bankruptcy?

There is not a scenario where an individual or business can get rich by filing for bankruptcy. The system just does not work that way. A person or business may already be rich and have lots of assets, then file bankruptcy and not be forced to pay all their debtors and creditors. Add to that certain state exemptions, and the debtor may still have quite a bit leftover, such as their 40-acre ranch pursuant to the Texas homestead exemption.

While there can be good outcomes for a debtor in bankruptcy, there is no way to “game the system” so to speak. There are processes and protections in place where people are appointed to oversee, if not take control of, your assets to ensure the debtor is not doing something backwards or lying about the assets they have. For example, in a Chapter 7 complete liquidation case, a trustee is appointed. The trustee will do one of two things:

1. Make sure all the paperwork, disclosures and procedures are followed properly
2. See if there is some asset the trustee can take and sell to give the money to the creditors in the process

The bankruptcy court and the trustee will be on the lookout for recent “debts” repaid to creditors who may be a related party. For example, if on Monday I owe the bank $10,000 and I owe my mom $10,000, and then on Tuesday I get $10,000 and give it to my mom. Then on Wednesday, I file bankruptcy. The bank may say it is not fair, or legal, to show preference to my mom. That allows a trustee to sue my mom as the recipient of a fraudulent conveyance and make her give the money back so it can be divided up amongst my creditors according to the rights they had before the transfer was made.

Is Bankruptcy Right for Me and My Business?

In an effort to be transparent, debtors are often advised not to make any bankruptcy decisions on their own. It is much more prudent to speak to a bankruptcy attorney first to ensure it is in your best interest to file bankruptcy and determine under which chapter of bankruptcy to file.

If you are a person or business that is so far in debt that you may never get out (something to the tune of $100 million in debt), then bankruptcy may be right for you. If a person with this type of debt is being hounded by creditors, it can make it difficult for them to even get a bank account.

There may also be entities that cannot pay all their debts because of something that happened in the past. A good example of this can be office buildings. In most cases, these structures were worth more before the pandemic than they are now. Many of them have mortgages from the days when those buildings were more expensive, only now the owner does not have the same occupancy and thereby not enough cash flow. However, the building still exists and does not have to be built again, so it can still charge some rent and pay some mortgage. Certain mortgage lenders may be unwilling to work with the debtor. Filing bankruptcy may be the remedy. A court-approved bankruptcy plan that restructures this debt may give the creditors some continuing cash flow rather than allowing foreclosure on the real estate, which can disrupt the market and the lives of the people who work in the building.

On the other hand, there are other situations in which bankruptcy may not be recommended.

If you or your business have a limited number of creditors that you are able to work with, it may be wise to try to settle outside of bankruptcy. Bankruptcy can be long and cumbersome and potentially more expensive that simply renegotiating with existing creditors.

Someone who owes a bunch of people a little bit of money, may have at least some creditors that do not try to collect. It is possible that some of those debts may even be unenforceable or released due to the statute of limitations. It would not be advantageous for a person to file bankruptcy the month before the statute of limitations runs out on their $200,000 IRS debt.

Because every situation is different, it is best to seek professional legal counsel from an experienced bankruptcy attorney to determine the best path forward before taking action.

It is worth noting that there are more than a few types of debts that do not get discharged in bankruptcy, including:

• Employment Trust fund taxes
• Excise taxes
• Sales taxes
• Child support
• Alimony
• Certain intentional acts (such as libel and slander)

Abuse of Bankruptcy

If you are filing bankruptcy just to buy time, it is probably not the best strategy to file as it turns over a great deal of authority to the courts and trustees to do things to you or your business that would not have happened otherwise. While it may stop a foreclosure for a while, unless you can pay the debt in that ninety-day window, it is likely a mistake. It is also considered bankruptcy abuse to file simply for the purpose of invoking the automatic stay.

If you are wondering whether bankruptcy is right for you and your business, know that it is a complicated area of law. It is very strategic in terms of when you should file, what you should do beforehand, and all the processes that come during and after bankruptcy. Proceed with caution and make sure you are doing what is in your best interest by making an appointment with a reputable bankruptcy attorney today.

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Making a will is one of the most important things you can do to protect your assets, but what happens if your heirs can’t find the original will? The short answer is that things could get problematic quickly. This is primarily because copies do not carry the same weight as the original in the eyes of estate law.

Before you make a will, it is vital to understand how to ensure it is legal, how to store the original, and what to do if you decide you want to revoke the will and begin anew. Without knowledge of these processes, you could risk your assets being distributed contrary to your final wishes.

What Happens When You Do Not Have the Original Will?

Probate courts need the original will because along with it comes the authenticity of the document. Without the original, there is a presumption that comes into play. It is not as simple as saying that your spouse or parent died, and you cannot find the original, but you have a copy of the will. The law will presume that without an original will, the testator, or person who made the will, destroyed it with the intent to revoke.

Some of the top reasons there is no original will to present include:

• Its location is unknown
• It is misplaced during a renovation or move
• It is destroyed in a natural disaster such as a fire or flood

That said, there are some instances in which it may be possible to overcome that presumption. For example, if the will was partially destroyed in a natural disaster, but some parts are still readable, and you have witnesses (often attorneys) who can attest that the will was only recently drawn up. Another way to overcome the presumption is if a spouse’s mirror-image copy still exists that was drawn up at the same time, and no legal heirs contest using a copy of the testator’s will in court.

Won’t My Lawyer Have Records of My Will?

Many individuals make the mistake of thinking that when an original will cannot be found, their attorney will have copies.

Years ago, lawyers often kept clients’ wills in a safety deposit box or a fireproof safe. The problem is that the lawyers then had the obligation to keep track of it for thirty to forty years or more. Consider what might occur if something happens to the lawyer during that time. Consider if the heirs would even know who the testator’s lawyer was at the time it was drawn up and if they would know how to reach them. If lawyers do have a copy, it is still just a copy. However, if an original will cannot be produced and no one is contesting it, then there may not be a reason to anticipate any problems.

Copies Require Notice

If the copy looks good, the circumstances for not having the original are not unusual and there are no obvious red flags or suspicions, everything may be fine. Yet, the caveat to this is that there must still be a notice put out to all the heirs that would potentially let them know the copy has been entered for probate and there is an application to probate using the copy. The heirs will need to be asked if they have any reason to protest. If the heirs sign waivers of notice saying they will not contest, it can be filed with the court.

Issues can occur if you cannot locate the heirs to notify them. You may have to hunt to find last known addresses, try to contact people who know where they are, and then issue a citation of personal service. If service of process fails, the person applying to probate the will may have to get a court-appointed ad litem to represent the heirs during any proceedings (see our previous blog and podcast about attorneys ad litem).

Copy of Will Scenario

Let us consider a scenario in which a person passed away. A woman, a former neighbor of the deceased, submitted a copy of the decedent’s 30-year-old will. The will left certain assets to the woman. The woman was not related to the deceased and hadn’t seen them in years. The deceased’s estate was close to four million dollars.

There were roughly 60 heirs that stood to inherit something if that copy of the will was invalidated. Because the copy of the will the woman submitted for probate was thirty years old, the woman was advised that she would end up losing her application to probate the copy and to settle.

The deceased’s estate paid the woman’s legal bills because she had done work to initiate probate proceedings. However, in the end, the deceased’s heirs inherited approximately two million dollars.

The lesson in this case is that if you have a legal will and you want there to be a specific distribution of assets upon your death, make sure you have an original that can be accessed by someone you trust. It can be a worst-case scenario when the will you actually wanted to be followed is thrown out by the court because there is no original and there is at least one heir who protests its probate.

Imagine this scenario. A mother passes away. The son and daughter are the heirs at law. The daughter has only a copy of the will in which her mother gives everything to her, and she submits it for probate. The brother could either sign the waiver notice, or he may contest the copy was something presumed to be destroyed with intent to revoke. In the latter case, the son would likely get half of his mother’s estate.

What To Know About Revoking a Will

An individual does have the power to revoke all previous existing wills and begin a new one. This is frequently done if, for example, children or grandchildren enter the picture after the first will was drawn up. The tricky part can be ensuring that the right people know about this change.

Consider this. A person had a will drafted two years ago and ensured that her daughter, cousin, lawyer, etc. have copies of that version. However, the person intends to now revoke it. What should they do?

Contrary to popular belief, tearing up the original will is a mistake. By doing so, it effectively makes the original disappear and then you are back to copies of wills. For a greater degree of protection, it is more efficient to mark the previous will “revoked,” put your signature near the word “revoked,” and put it back in the file. This ensures that when someone presents a copy of the original will, someone else with the original marked revoked can submit it as proof that the copy is null and void. The next step would be to formally create a new will.

Storing Your Original Will

With the importance of an original will already established, the next item on the to do list is to make sure the document is properly safeguarded.

Many individuals choose to store their wills in a safety deposit box at a bank. However, this is not a completely foolproof method. Not all safe deposit boxes are watertight. Should there be a flood, and the will is damp and slightly damaged but still readable, it may be okay. However, should the flood destroy the official document, then you are once again without an original.

Avoid storing original wills in safety deposit boxes or fireproof safes that are underground or at ground-level. Flood waters will be a threat to those documents. Even when putting them in those places above ground, it may still be wise to first put them in a sealed plastic bag.

Lastly, make sure that someone you trust will know where to look for the stored document after you pass. It is key to choose someone you do have a great deal of trust in. This is because whoever finds the original document may compare what they will get from the will that versus what they will get if there is no original document. An untrustworthy person may choose whichever is to their best advantage and could destroy it.

Important Takeaways for Wills

In review, here are the top takeaways about creating, revoking, and storing wills:

1. Make a will and ensure that it is done formally
2. Have witnesses and ask them to sign the document in blue ink
3. Safeguard the original will in a place where it will be well protected (preferably above ground)
4. If you revoke a will, be vocal about it and ensure that you preserve evidence of the fact that the old will has indeed been revoked
5. Make it known to a trustworthy person where the original will is located

Attempting to probate a copy of a will can create undue confusion and heartache. Work with a reputable estate attorney to make sure you are following all the necessary previsions so that your assets will be distributed as you truly wish upon your passing.

If you are planning to apply to probate an estate and do not have an original will, make sure you understand all the steps to comply with the law of your state. A trusted estate and probate attorney will be able to help you with all court requirements.