When you do not pay your taxes, the Internal Revenue Service (IRS) has the power to file a “lien” on your property under Internal Revenue Code section 6321. The lien attaches “upon all property and rights to property, whether real or personal, belonging to such person.” Practically, this means that the IRS is giving notice that you owe it money and its debt gets priority to most debts that occur after the lien notice is filed. Historically, the lien law has been interpreted strictly and “foot faults” can invalidate the lien. A recent case, however, provides that if the federal tax lien uses the incorrect name, the lien may still be established and enforceable.
The taxpayer and his wife purchased their home as joint tenants in 1975. The taxpayer became the sole owner of the property after his wife passed away. In July 2007, the taxpayer filed federal income tax returns for tax years 2000 to 2004. Based on those returns, the IRS assessed taxes, penalties and interest, which remained outstanding at the time of his death in July 2009. On August 9, 2010, the government recorded a notice of federal tax lien (the Tax Lien Notice) against the taxpayer with the appropriate recorder of deeds in an amount equal to the previously assessed amounts. The Tax Lien Notice omitted the second “l” in the taxpayer’s first name, and failed to include a legal description or permanent index number for the property. The Tax Lien Notice did identify the correct address.
In November 2010, the taxpayer’s heirs conveyed title to the property to a third party, which made certain improvements and capital investments in the property. On June 12, 2017, the government filed a complaint and began proceedings to foreclose the tax lien. The district court found that there was “adequate notice of the tax lien because it conformed to the applicable provisions of the Internal Revenue Code; and the Government could enforce the tax lien which encumbered the Property.”
The issue before the US Court of Appeals for the Seventh Circuit, in relevant part, was “whether the spelling error is so egregious as to render the Lien unenforceable.” The Seventh Circuit held the Tax Lien Notice was valid and enforceable because a reasonably diligent search would have discovered the Notice. The Seventh Circuit noted that a federal tax lien only needs to provide constructive notice necessary for a potential buyer to discover “cloud on the title” based on a reasonable and diligent title search. Relying on the district court’s findings, the Seventh Circuit further noted that a search with the correct spelling of the taxpayer’s name did not return the Tax Lien Notice. However, a search with the correct spelling did include Mr. the taxpayer’s aliases, including the incorrect spelling. The Seventh Circuit further noted that the district court found that a search for the taxpayer’s last name with first names the first letter and a “sound like” search for the last name both returned the Tax Lien Notice, and a search conducted by the a third party on behalf of the IRS returned the Tax Lien Notice. Accordingly, the Seventh Circuit held that the Tax Lien Notice was enforceable because a reasonably diligent search would have returned the Tax Lien Notice.
The Seventh Circuit’s full opinion may be found here.
Practice Point: This area of tax law is very form driven, so it is important to make sure that you review the notice of tax lien carefully to make sure it is accurate. Although in Raines, the court held in favor of the government on its priorities claims, the misspelling could have cost the government the amount of tax that the taxpayer owed.
