It's bad enough to have either the state or the federal government seize your property, but what happens if both the state agency and the Internal Revenue Service (IRS) put liens on your property? What then?

“First in Time is First in Right”… Unless It's Federal Tax Debt

The general principle for liens is that priority for payment is determined by “first in time,” meaning that those who filed first have priority over those who made later filings.

However, in U.S. law, federal claims take precedence over state claims. Applying this principle to tax liens, the IRS skips to the front of the priority line, ahead of liens placed on a property by state governments and private parties.

When the State Can Get Priority Ahead of the IRS

There is a notable exception to the IRS's receiving the first priority on a lien. And that is if the state's filing predated the IRS' filing and the filing itself is “choate.” Choate is a legal term describing a completed and perfected filing. (Choate is a term rarely heard outside legal circles, so it helps to think of its opposite, inchoate—a more common word that means something is not yet fully formed.)

According to U.S. law, a state lien can regain priority over a federal tax lien if the state's lien is choate before the federal lien was filed. But there's an essential wrinkle to this. A federal lien is automatically considered to be choate—even if the reality is that there is some information missing or a process that has yet to be completed.

By contrast, the state must prove its lien is choate. To do that, the state lien must specifically identify the following:

• the lienor's identity
• the lien amount
• the property that the lien is attached to

But this doesn't mean the state can satisfy these with a very specific lien document. The requirements aren't fulfilled until the state has fulfilled all underlying levy requirements. Therefore, the state doesn't identify the lienor until it has assessed the tax. It can only satisfy the amount requirement when the state has completed all the procedures necessary to enforce a levy. And at any point, if the lien doesn't meet the state's own requirements for a lien, then the state's lien is inchoate, and the federal lien once again takes precedence.

Ultimately, deciding which lien takes precedence is a call for a federal judge to decide.

But there's no need for taxpayers to wait for such a decision. The better course is determining how to protect your property from any levy—federal, state, or otherwise. If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.