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The Notice of Federal Tax Lien: The IRS’s Gateway to Bankruptcy

In 2014, I wrote about the role that a proof of claim plays in New York bankruptcy, but not all creditors use those. Notably, when the IRS enforces a debt in bankruptcy it will instead file a Notice of Federal Tax Lien (NFTL). What are these?

As with all statutory liens, an NFTL creates a secured debt that when properly filed attaches to all of a debtor’s property. This means debtors’ exemptions are of no avail to them. If a debtor must sell an asset, like an exempt house owned free and clear of a mortgage, then the house must be sold. The primary difference between a tax lien and other statutory liens is that in some circumstances, tax debts are dischargeable. In the meantime, tax debts are usually priority debts in chapter 13.

Although NFTLs are serious obstacles for debtors to handle in a bankruptcy, there are a few more things about them debtors should know. For one, NFTLs do need to be correctly filed, and the requirements differ by each state. New York’s requirements can be found in section 10-A of the Lien Law. In general, though, the NFTL must conform in a few ways to be valid.

(1)  It must identify the taxpayer.

(2)  It must specify the tax year.

(3)  It must accurately state the tax assessment.

(4)  It also must specify the assessment’s release date.

Importantly, however, debtors should not assume that an NFTL has been filed properly. Debtors can challenge the IRS in an adversary proceeding if they believe the IRS made a mistake in the NFTL or didn’t follow the process properly. This can be of great help for debtors whom the IRS has mistaken for others, and it aids debtors who can show that they’ve paid down their tax debts or dispute the amount owed. Although, bankruptcy courts will give the IRS leeway to correct small errors on NFTLs.

If an NFTL is invalid for whatever reason, then the lien does not attach to the debtor’s property in the bankruptcy case. In that circumstance, whatever tax debt does exist will not be a secured debt and may be discharged as any other debt. Debtors are rarely lucky enough to discharge tax debts based on IRS errors. Otherwise, if the NFTL is proper, then the tax debt enters the bankruptcy and the rules for discharging a tax debt apply.

NFTLs and the tax debts that they represent are not the hardest issues to deal with in bankruptcy, but because of their precise rules, cases involving them benefit from the help of an experienced New York bankruptcy lawyer.

For answers to more questions about tax debts in bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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