What is an FTB Tax Lien?
A lien is a charge upon real or personal property to satisfy debt ordinarily arising by operation of law. A lien legally encumbers California property, preventing the property from being sold or transferred through escrow as long as the lien exists. The Franchise Tax Board (FTB) files liens if a non-compliant taxpayer or business entity has a delinquent tax liability. Generally the FTB will mail a notice to the taxpayer that it intends to file a tax lien with the county recorder’s office. In addition, a lien is often confused with a levy. A levy is different in that a levy is the taking of property of the taxpayer. The most common levy is a bank levy where the FTB orders the bank to remit the taxpayer’s bank account funds to the FTB.
Revenue and Taxation Code Section 19221 provides that if a tax liability is not paid at the time that it becomes “due and payable” and due process is served, then an enforceable state tax lien is created for the amount of the tax liability. Since the lien arises by operation of law, it is termed a “statutory lien.”
Due and Payable Date
Revenue and Taxation Code Section 19221 also defines when a tax liability becomes “due and payable” for purposes of creating a state tax lien. The date the tax liability becomes due and payable is known as the statutory lien date. The conditions vary for different types of assessments. For the types of assessments listed below, state tax liens arise on the following dates:
- The state tax lien arises on the date the amount is established on the records of the department (generally, the return status date of the assessment) for the amount of any liability disclosed on a return filed on or before the date payment is due and for the amount of any liability disclosed on a return filed after the date payment is due.
- The state tax lien arises on the date a Jeopardy Assessment (J/A) notice is mailed or issued for amounts of any liability determined by the J/A. See Section 18.104.22.168 Jeopardy Assessments.
The Franchise Tax Board, Internal Revenue Service, Board of Equalization, and the Employment Development Department have an agreement to compare statutory lien dates to determine priority for payment on competing liens. Requests for statutory lien date comparisons are referred to the Collection Advisory Team (CAT).
How long does an FTB Tax Lien Last?
A state tax lien is a general lien, which arises by operation of law (Revenue and Taxation Code Section 19221) and continues in effect for 10 years from the date of its creation. It attaches to all property and rights to property, whether real or personal, belonging to the taxpayer or entity located in California. The lien attaches to property owned by the taxpayer or entity at the time the lien arises and property subsequently acquired by the taxpayer or entity
A notice of state tax lien (NSTL) is extinguished 10 years after the date of its recording unless an Extended Notice of State Tax Lien is recorded in a county recorder’s office or filed with the Secretary of State as an extension of the original lien.
Recording of the Tax Lien
Government Code Section 7171 authorizes both the recording of a Notice of State Tax Lien (NSTL) in the office of a county recorder and the filing of a NSTL with the Secretary of State (SOS) at any time after the state tax lien is created and before it is extinguished. Unless an extended notice of state tax lien is recorded or filed, a notice of state tax lien is extinguished 10 years from the date of its filing.
When a NSTL is “recorded” with a county recorder or “filed” with the SOS, the state tax lien remains in effect for 10 years from the date of recording or filing. The effectiveness of a state tax lien may be extended further by recording an Extended Notice of State Tax Lien within 10 years from the date of the previous recording (SOS Lien Extensions can only be filed within six months of the expiration date.).
Filing and recording a NSTL in a county recorders’ office or with the SOS establishes a public record of the state tax lien against all real property, personal property, and rights to personal property belonging to the taxpayer or entity that is located in California. It fixes the priority of the state tax lien against other subsequent liens and encumbrances created by filing with the SOS such as financing statements filed by lenders and judgment liens against personal property filed by judgment creditors.
Extending State Tax Liens
Liens may be extended on a case-by-case basis, after consideration of all facts and circumstances of each case. Generally liens are considered for extension only if all the following conditions are met:
- The assessments are on filed tax returns, affirmed audits or filing enforcement assessments where the facts of the case indicate a reasonable expectation that the filing of tax return(s) would result in a balance due, including tax, penalties, and interest; and
- There is a reasonable expectation that the lien will result in payment because the taxpayer or entity owns, or is likely to acquire real property in the future.
Additional factors that may be considered before extending a lien are:
- Taxpayer’s age. (PIT only); Taxpayer’s health. (PIT only); Taxpayer’s or entity’s future earnings potential and ability to acquire real property in the future; Taxpayer’s or entity’s current financial condition; Basis of assessment: Filed returns, Affirmed audits, Filing Enforcement assessment(s) reporting W-2 wages, K-1 information, 1099 payments, pension and retirement distributions, or other filing enforcement assessments that would likely have a balance if the return(s) were filed. (PIT only); Taxpayer’s occupation or entity’s business is in the real estate areas, such as a realtor, developer, or contractor, especially if 1099 payments are also present; Taxpayer or entity owns real property of value.
Priority of State Tax Liens
The priority of a state tax liens, relative to other types of liens on the taxpayer or entity’s property, and the rights of persons who acquire the taxpayer or entity’s property after creation of the state tax lien, vary depending upon whether or not the existence of the state tax lien has been established as a public record by the recording of a Notice of State Tax Lien (NSTL) with the county recorders office or with the Secretary of State (SOS).
Generally, prior to the recording or filing of the notice, the state tax lien is only valid against other governmental statutory liens created after the state tax lien. After recording or filing, the state tax lien is valid against additional kinds of liens and encumbrances attaching to the taxpayer or entity’s property after the date the NSTL is recorded or filed.
It is the FTB’s position that between competing state and federal tax liens, the lien that first comes into existence has priority over the lien that later comes into existence. The recording or filing of a NSTL or notice of federal tax lien will not affect the priority.
The date a federal tax lien comes into existence (statutory lien date) is the Internal Revenue Service’s (IRS) “assessment” date (See Sections 6321 and 6322 of the IRS Code). Generally, the “assessment” date is noted on notices of a federal tax lien.
For IRS tax assessments made before July 1, 1978, the FTB compares the date of assessment by the IRS with the recordation of the lien in the county recorder’s office. For IRS tax assessments made on or after July 1, 1978, the date of assessment by the IRS is compared to the date the FTB’s assessment became final under the assessment statutes.
Release of a State Tax Lien
Once a Notice of State Tax Lien (NSTL) has been recorded or filed to create a public record of the existence of the state tax lien, a release of lien must be recorded or filed to establish a public record that the state tax lien has been satisfied and no longer encumbers the taxpayer or business entity’s property.
An FTB lien can be released without being satisfied under the following situations:
- The amount due is sufficiently secured by a state tax lien on other property or the release of lien will not jeopardize collection.
- The liability underlying the state tax lien is legally unenforceable. For instance, in certain circumstances a liability may become legally unenforceable as a result of a discharge in bankruptcy proceedings under federal law.
- FTB has determined that the state tax lien has been recorded in error. In those instances FTB must send a copy of the lien release to the three major credit reporting companies. or
- A partial release of lien fully removes a state tax lien from a specific piece of property as described in the partial release. Other property owned by the entity, or subsequently acquired by the entity, remains subject to the state tax lien.
Through a subordination of lien, the FTB permits another lien on a specific property to take priority over the FTB’s state tax lien, even though the other lien may not otherwise have priority over the state tax lien. A lien release, on the other hand, establishes a public record showing the state tax lien was satisfied and no longer encumbers the taxpayer or entity’s property.
Contact a Tax Attorney today for a free consultation
If you have a tax liability with the IRS or FTB, SBOE or EDD, the taxing agency can file a lien against you. There are steps you can take to resolve your tax dispute to avoid unwanted collection actions. Contact a tax attorney at Disparte Tax Law today for a free consultation.