September 26, 2018

Family Member’s Mortgage Filing May Trump IRS Lien

Tax Relief Articles

Houston Tax Attorney

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If a child owes unpaid taxes to the IRS, can the parent file a lien against the child’s property to prevent the IRS from levying on the property?  The court considered this in United States v. Allahyari, No. C17-668 TSZ (W.D. Wash. 2018).

The Facts & Procedural History

Upon graduating from law school in the early 1990s, the taxpayer’s father suggested that he invest in real estate.  To help him do so, the father and the son paid $40,000 for a property that was to be owned by the son.  The parties recorded the $40,000 in a promissory note that was filed with the county.

The father than advanced other sums to the son over the years.   The son made payments to his father, but did not pay off the debt to his father.

In the early 2000’s, the son failed to file or pay his income and employment taxes.  By the time he filed his returns in 2005, the son owed several million in unpaid back taxes.

The son told his father about the tax debts and consulted with a tax attorney, who advised that the IRS was likely to seize the house.  The tax attorney recommended the father secure his interest with a deed.

On July 26, 2005, the father filed a deed of trust for the son’s real estate property.

The IRS collection efforts ensued, resulting in the published court opinion.  The question for the court was whether the father’s 2005 mortgage takes priority over the IRS’s liens for unpaid taxes.

The IRS’s Lien for Unpaid Taxes

The IRS’s lien for unpaid taxes arises by operation of law.  This means that the IRS does not have to file the lien in the public records to make it valid.

The IRS’s unfiled lien is valid against most unsecured creditors even if the IRS lien notice has not been filed.  The IRS’s lien may or may not be superior to other secured creditors.  This rule only applies if the (1) lender actually advanced funds to the taxpayer at or around the time of the mortgage and (2) the lender did not know or have constructive knowledge of the unpaid taxes owed to the IRS.

Mortgage Filings May Have Priority over IRS Liens

In Allahyari, the lender-father had actual knowledge of the IRS lien for unpaid taxes.  This was the very reason why he made the mortgage filing.  Moreover, the father did not lend money to the son at or around the time the mortgage was filed.  As such, the court did not accord the father’s mortgage priority over the IRS’s liens.

But if the facts were different, such as if the father was not aware of the IRS lien for unpaid taxes and the father did actually advance funds to the son at the time of the mortgage filing, the father’s mortgage may very well have precluded the IRS from seizing the son’s real estate.

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