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Federal Tax Liens, the Federal Priority Statute, and Collection Periods

On Behalf of | Apr 24, 2024 | Employment Tax Law |

When a taxpayer owes money to the Internal Revenue Service (IRS), the federal government has a powerful tool to collect that debt: the federal tax lien. This lien can potentially turn into a judgment, extending the IRS’s window to collect for decades.

Federal tax liens, the Federal Priority Statute, and judgements

As discussed in our previous posts, this type of lien allows the government a means to protect its legal claim to a taxpayer’s assets when the taxpayer fails to pay their tax obligations. The lien protects the government’s interest in the taxpayer’s assets, including financial assets and personal property. The Federal Priority Statute comes into play when a taxpayer has insufficient assets to satisfy all creditors. This statute allows the federal tax lien to take precedence over other creditors’ claims, ensuring the assets go to the IRS first.

The IRS may convert a tax lien into a judgment through legal proceedings. This action can extend the collection period significantly, sometimes up to 30 years or more.

Application to employment taxes

Employment taxes, such as withheld income and FICA taxes, are trust fund taxes that employers hold in trust until they pay the taxes to the Treasury. When an employer fails to pay these taxes, the IRS can assess a Trust Fund Recovery Penalty (TFRP) against the individuals responsible for collecting or paying these taxes. If not resolved, this can lead to a federal tax lien. The IRS generally has ten years from the date the tax was assessed to collect on that tax, known as the Collection Statute Expiration Date (CSED). The IRS can get an extension on this deadline.

The extension of the collection period has significant legal implications. Businesses and individuals may find themselves facing long-term financial challenges as a result of these extended collection efforts. Additionally, the judgment may appear on credit reports, affecting creditworthiness and the ability to obtain financing.

The power of the federal tax lien and the reach of the Federal Priority Statute demonstrate the importance of addressing employment tax issues promptly. There is also the potential for a lien to become a judgment and extend the collection period. These facts serve as a stark reminder of the legal impacts of tax debts. It is important for taxpayers to understand their rights and options to navigate these complex situations effectively.

Enforcement efforts are aggressive, legal strategies can help

The IRS has many methods they will use to find taxpayer’s assets and will not hesitate to seek an extension on the collection period.

Navigating the intricacies of federal tax liens and the implications of the Federal Priority Statute is overwhelming. Taxpayers facing such issues should seek professional advice to understand the best course of action. This can include discussions about addressing tax debts early to prevent the transformation of liens into lengthy judgments and protect financial stability in the long run as well as options to challenge the IRS’ claims.

Kundra & Associates has been a trusted source of guidance for over 30 years. Serving clients in Bethesda, Arlington, Rockville, Alexandria, and Washington D.C., as well as globally, we specialize in providing clear and effective advice on policies and procedures aimed at protecting your assets from the potential adverse consequences of tax audits. If you’re looking to leverage our wealth of experience and knowledge, please feel free to get in touch with us online or give us a call at 301-597-4975.