Beware of Springing Liens

If the Internal Revenue Service has a publicly filed lien against a taxpayer, that lien attaches to all real and personal property owned by the taxpayer. However, that lien can be extinguished if a senior lienholder (e.g., a mortgagee or the holder of a security interest) forecloses on his lien rights and the Service does not elect to redeem the property within 120 days. Typically, the owner of the property also has a right of redemption.

Under the facts presented in TAM 200302043, the Service’s right of redemption, in a sense, sprung back into life after it had seemingly been extinguished. There, the mortgagee foreclosed on the real property and the IRS failed to redeem within the statutory 120 day period. However, a third party purchased the owner’s right of redemption. The Service held that because the notice of tax lien had been filed prior to the time the third party purchased the right of redemption, the tax lien attached to the right of redemption. When the third party exercised the right of redemption, the tax lien sprang back into life and reattached to the property.