The Effects of a Federal Tax Lien in Colorado and Bankruptcy

October 22, 2010

By: David M. Serafin

Under Section 6361 of the Internal Revenue Code, a Federal tax lien may arise by operation of law if you do not pay all taxes owed to the U.S. Government.

This lien is often referred to as an automatic or statutory lien which attaches to all property that you own, including almost all real and personal property. The Federal tax lien also includes accompanying interest and penalties, not just the underlying tax owed.

The Federal Tax Lien typically arises if, after 30 days has passed after the IRS mails a demand in writing to pay the tax, interest and any penalties, no payment has been made. The IRS can then file a Notice of Federal Tax Lien with the recorder in your county of residence and also with the Colorado Secretary of State, regardless of the property you own.

A Notice of Federal Tax Lien which has been recorded can show on your credit report and, like any other secured or unsecured debts such as from credit cards, medical bills or a mortgage debt, can damage your credit rating should the debt remain unpaid.

If you cannot extinguish a Federal tax lien by paying in full the underlying tax, interest and penalties, and if the statute of limitations for collection has not yet expired, bankruptcy may be a viable option. (A fourth option is to file an Offer in Compromise for debtors whose only debt is to the tax authorities.)

If the tax debt can be discharged or even in the event that part or all of the tax debt is required to be paid back in a Chapter 13 payment plan, the IRS will issue an IRS Certificate of Release of Federal Tax Lien upon the bankruptcy discharge order being entered (5-6 months in a chapter 7 bankruptcy or 3-5 years in a chapter 13 bankruptcy). But, please note that the issuance of an IRS Certificate of Release of Federal Tax Lien is an all or nothing proposition: the FULL amount of the tax, interest and penalties owed must be paid off or else the lien will continue to show the original amount owed to the IRS. Once the bankruptcy discharge order enters, the IRS is required to issue the Certificate of Release within 30 days in which case you’ll then want to file the Certificate with the local recorder’s office (and the Colorado Secretary of State, if necessary) and as well as to any credit reporting agencies.