I was listening to an IRS attorney tell a story about his early days with the service and I was nodding my head the whole time.  Basically the story involved a missed Federal Tax Lien on a title search and I could see exactly how that might happen.  I would not be surprised if some of the searchers today would not even be properly checking for them.  Thus, I posed a hypothetical question in the Source of Title forums.  First, let me relay the story told by the IRS attorney, then I'll review the hypo.

When the IRS attorney was fairly new with service, he was asked to write a letter to a homeowner.  They were working on collecting from a taxpayer who owed a "heap of money" in back taxes.  The taxpayer had sold his home and left the country, but the IRS had properly filed a Federal Tax Lien. Half jokingly, he told us that his first draft of the letter went something like this:

Dear homeowner:

The IRS has a valid Federal Tax Lien on your home to collect a debt from the prior owner.  We will be seizing your home and selling it to satisfy the lien.  We apologize for any inconvenience this may cause.

Sincerely,
The IRS

Of course, the final letter didn't go out worded quite like that.  He explained the situation a bit more thoroughly and recommended that the homeowner contact their title insurance company.  Fortunately, the homeowner had an owner's policy and they took care of the claim.  However, it made me wonder how many searchers today would likely miss a Federal Tax Lien.  There are a lot of inexperienced abstractors today who were never properly trained.  Thus, my hypothetical question.

CHAIN OF TITLE

Warranty Deed
To: Fred and Wilma Flintstone
From: Barney and Betty Rubble
Dated: 1/1/2006
Recorded: 1/3/2006

Warranty Deed
To: Barney and Betty Rubble
From: Homer and Marge Simpson
Dated: 6/15/2000
Recorded: 6/16/2000

Warranty Deed
To: Homer and Marge Simpson
From: George and Jane Jetson
Dated: 3/20/1977
Recorded: 3/20/1977

Warranty Deed
To: George and Jane Jetson
From: Fred Jones and Daphne Blake
(Scooby Doo, signing to release his interest in the dog house)
Dated: 11/18/1958
Recorded: 11/19/1958

QUESTION #1: How far back in the index do you run the Flintstones?

QUESTION #2: Does your answer change if you are only asked to do a current owner?

QUESTION #3: How far back in the index do you run the Rubbles?

As was pointed out on the forum, the questions are "kind of state dependent."  However, I was really looking for answers that would pick up Federal Tax Liens, which would be the same in all states.  Thus, while some states might require more than others, there would be a minimum acceptable answer due to the application of federal law.

The answers varied considerably, which I assume could be attributable to state differences.  Everyone, though, seemed to recognize the need to search back prior to the ownership of the Flintstones and Rubbles to check for liens that would attach to after-acquired property, such as Federal Tax Liens. Kudos to the sharp abstractors on the Source of Title forums.

I still believe, however, that there are a lot of searchers that only search property owners from the time they acquired title through the time they covnveyed title (both are unacceptable). I especially believe this happens frequently on current owner searches.  I don't think that it is a big stretch to imagine a Federal Tax Lien would be missed if it was filed before the property owner acquired title (or after it was conveyed).

A Federal Tax Lien is effective as of the date of the assessment of the delinquent taxes.  However, to be enforceable against a bona fide purchaser, holder of a security interest, lien claimant or judgment creditor, the IRS must properly record the lien.  The lien remains valid for 10 years after the date of assessment and, of course, attaches to after-acquired property.

Thus, it is important to check all of the parties in your chain of title before they acquired title to the extent that a valid Federal Tax Lien could remain valid.  Likewise, prospective purchasers much be checked, as well, to ensure that the property will not be subject to a Federal Tax Lien when they take title.

There is some relief provided from the harshness of the after-acquired effect, however, at least for holders of purchase money mortgages. The IRS has issued a Revenue Ruling dealing with purchase money mortgages.

Although so-called purchase money mortgages are not specifically referred to under present law, it has generally been held that these interests are protected whenever they arise. This is based upon the concept that the taxpayer has acquired property or a right to property only to the extent that the value of the whole property or right exceeds the amount of the purchase money mortgage.

Still, it is very important to search for Federal Tax Liens to protect the owner and the title insurance companies.

It is also noteworthy that the abstractor should search the grantor even after he has conveyed title.  If the grantee did not qualify as a bona fide purchaser, the property may be subject to a lien filed against the grantor after title has been conveyed.

And, in the case of a foreclosure, the IRS has a right of redemption even if it has been made a party to the action.  For up to 120 days after a sheriff's sale, the IRS can redeem the property by paying the purchaser the purchase price.  This can be devastating to a purchaser who buys property at sheriff's sale with the intention of making significant improvements.  Thus, it cannot be assumed that the foreclosure has taken care of a Federal Tax Lien - if the foreclosure was recent, the abstractor must still report Federal Tax Liens from prior owners.

Abstracting is more complicated than many people realize.  The Federal Tax Lien is only one of many areas that can create a trap for the inexperienced searcher.  That is why it is so important to utilize skilled, experienced, professional abstractors.  Abstracting is not something that can be learned in a weekend-seminar or an online course. 

Robert A. Franco
SOURCE OF TITLE