Do you have questions about how your perfected security interest will be affected by a federal tax lien? Are you at risk to losing priority in regard to after-acquired collateral in the event a federal tax lien is filed against your debtor? Attorney Bennett Cohen of Illinois law firm Cohen, Salk & Huvard, P.C., gets asked questions like this all the time, and has taken the time to write some answers regarding federal tax liens. You may also want to check out his eBook on Purchase Money Security Interests (PMSI).
Notices of Federal Tax Lien: Must the IRS file a notice of federal tax lien against the exact legal name of the borrower?
Answer: No. Under the Sixth Circuit decision in In re: Spearing Tool and Manufacturing Co. Inc. 412 F.3d 653 (6th Cir.), the IRS does not have to file the notice of federal tax lien against the exact legal name of the borrower. The Court held that the IRS lien “need not perfectly identify the taxpayer.” The Court determined that in evaluating an IRS filing, the critical issue is “whether a reasonable and diligent search would have revealed the existence of the notices of the federal tax liens under these names.” The court concluded that the bank had not conducted a “reasonable and diligent” electronic search because it failed to search common variations of the corporate name of the debtor, and as a result, the notices of IRS tax liens were sufficient under federal law, and the IRS’s lien had priority over the bank’s lien. As a result of this case, lenders are encouraged to obtain a federal tax lien search on the borrower’s exact legal name and all possible name variations (including any name used in the borrower’s past federal income tax returns and in borrower’s E.I.N. application).