Tax Liens

Secured Tax Claims

Tax debts are secured if the taxing authority follows the proper procedure to obtain a tax lien. Tax liens securing the payment of Texas state taxes (property, sales and unemployment taxes) attach to a taxpayer’s equity in all property except for the property exempt from seizure under Texas Sate exemption law. Texas State law provides for fairly liberal exemptions compared to the exemption laws of most other states.

Federal tax liens attach to a taxpayer’s equity in all property except for the very limited amount of property exempt from seizure under federal tax laws. Almost no property is exempt from collection of federal tax debts except for wearing apparel and a limited amount of household furniture, personal effects and tools of trade.

Tax Liens Survive Bankruptcy

A tax lien will continue to exist after the entry of a bankruptcy discharge with respect to all property the taxpayer owns on the date he files for bankruptcy. Although the tax lien survives bankruptcy, the taxpayer’s personal liability to pay the tax will be released if all other requirements for a bankruptcy discharge are satisfied. This means that after the entry of a discharge order, the taxing authority can never collect the tax as a personal obligation of the taxpayer, but can pursue collection by seizing and selling any property the taxpayer owned on the date he filed for bankruptcy.

This also means that if the IRS has properly filed a federal tax lien to secure payment of taxes that are dischargeable in your bankruptcy case and you own a home that has no equity on the date you filed your bankruptcy case and you choose to retain the home, and if the value of the home increases and you reduce the principal balance of the mortgage through your normal mortgage payments, then the IRS lien attaches to the increased equity in the home and they are entitled to be paid the full amount of the tax liability that was discharged in your bankruptcy case in the event you want to sell your home. You should consult a Board Certified Bankruptcy Attorney to discuss your options if you have this type of situation.

Federal Tax Liens Are Not subject To a Taxpayer’s Federal or State Exemptions

A properly filed federal tax lien will attach to all of the taxpayer’s property, even property that would be exempt from seizure for other debts under federal or state law. The filing of a bankruptcy case will not change that result, although IRS is usually never interested in taking essentially worthless personal property. After the bankruptcy court enters a discharge order, IRS will normally release a federal tax lien if the taxpayer owns nothing more than household furniture, clothing or other personal property of insignificant value.

Tax Liens Do Not Attach To Property Acquired After Bankruptcy

Tax liens do not attach to property acquired by a taxpayer after he files for bankruptcy, unless he acquires the property with funds or property he owned before filing for bankruptcy. In other words, if the tax debt is dischargeable, and the taxpayer acquires any property after he files bankruptcy, with funds earned after the bankruptcy filing, the taxing authority will not be able to seize and sell the post petition property to pay the tax. For this reason, a tax lien will not affect a taxpayer with few assets on the day he files for bankruptcy.

Property Exempt from Federal Tax Seizure

The following property is exempt from a federal tax levy (i.e. can not be taken to satisfy a federal tax debt):

  • wearing apparel and school books;
  • fuel, provisions, household furniture, personal effects, arms (guns) for personal use, livestock, and poultry (maximum value – $6,250);
  • books and tools of a trade (maximum value – $3,125);
  • unemployment benefits;
  • undelivered mail;
  • railroad workers and U.S. Armed Services annuity and pension benefits (other retirement plans not covered);
  • workmen’s compensation benefits;
  • wages in the following amounts;
  • amounts required to pay court ordered child support; plus;
  • the standard tax deduction ($4,750 in 2003) plus the number of personal tax exemptions allowed ($3,050 per exemption in 2003). For an individual, the amount in 2003 would be $650 per month ($4,750 + $3,050 divided by 12);
  • service-connected disability benefit (as defined by 38 U.S. Code 101(16);
  • public assistance benefits under the payments. the Social Security Act, or state welfare programs;
  • Job Training Partnership Act payments;
  • residences in cases where the amount of the levy does not exceed $5,000.