As a lender, it's your prerogative to learn as much as you can about a potential borrower's finances before you offer terms and finalize a loan. You get this information through due diligence, which involves searching for claims on the person or business's property.
Best practice for due diligence involves a four-part search of:
- UCC lien search
- Federal tax lien search
- State tax lien search
- Judgment lien search
Finding a recorded UCC-1 financing statement is relatively straightforward: you query the Secretary of State (SOS) where the property is located, or where the borrower is incorporated.
If there are liens on a borrower's real or personal property, including federal and state tax liens, you might not be the first party to get paid if the borrower defaults or files for bankruptcy.
Searching for tax liens comes with a few stumbling blocks. Creditors record state tax liens differently from one jurisdiction to the next, and if you’re not well-versed, you can make a costly lending mistake. Here are the tax lien search basics you need to know to ensure your interest is prioritized.
What is a tax lien?
A tax lien is an interest recorded by a federal or state government agency against a person or business's assets, including real estate, personal property, inventory, equipment, and financial assets. A government agency acquires a tax lien when it levies a tax against a party, which then fails to pay it on time. The Internal Revenue Service (IRS) or state records the lien against the debtor's property until they pay their tax liability in full.
What are the different types of tax liens?
- Federal tax liens filed by the IRS: This is the government's legal claim against a property when the debtor fails to pay a federal tax debt. A federal tax lien is recorded at the request of the IRS and cannot be discharged in bankruptcy.
- State tax liens: This is the state government’s legal right over a debtor's property to secure tax that is owed, typically state income or property taxes. The state's taxing authority files a lien against the debtor’s property when they fail to pay the amount owed. A state tax lien is recorded at the request of governmental agencies.
- County tax liens: This works similarly to state tax liens, and its application is subject to the state law. Each county has varying rules and regulations regarding the payment and lien certificates.
Why do tax liens matter?
An IRS tax lien usually takes priority over other creditors — even those who perfected their interests before the federal tax bill came due. State income and property tax liens also take precedence over other creditors in certain circumstances.
A tax lien differs from a UCC lien because a recorded UCC financing statement shows a borrower agreed to give a lender an interest in a particular property in exchange for a loan; it's a consensual lien. Tax liens, whether federal or state, are non-consensual. The borrower didn't agree to the government taking a security interest in their property.
In some cases, the debtor isn't even aware there's a tax lien against them. What does that mean for you? They wouldn't have disclosed it to you when applying for the loan. The likelihood of undisclosed tax liens is one reason why your due diligence must include state and local tax lien searches.
How to search for tax liens
There are many places to go for a tax lien search. The key is to know exactly where to go for a federal/IRS tax lien search, state tax lien search, or county tax lien search.
Federal/IRS tax lien search
You can conduct a federal tax lien search at the following places:
- State Recorder's office
- Secretary of State's office
- IRS Automated Lien System database
- Private third-party database search services like Lien Solutions
State or county tax lien search
Information on a tax lien is either maintained by the Secretary of State or the county tax office. Where the government records its interest depends on state law. Some states require recording certain interests at the state level. For example, Colorado files tax liens with its Department of Revenue's Division of Taxation. Many others require agencies to secure liens in the county records office where the person, business, or property is located.
Several states have formed a tax lien registry which serves as a centralized location for recording and searching for tax liens. These states file all tax liens with the registry instead of at the county level, giving you one place to look instead of searching for information in several county offices. Some states that have established a tax lien registry include Mississippi (2015), Illinois (2018), and South Carolina (2019).
Why tax lien searches are complicated
States' differing rules and procedures for filing liens can complicate your tax lien search.
The three most common issues that can complicate your tax lien searches are:
- Incomplete tax lien database: State tax lien registries might not go back decades and older tax liens could exist. Information on the IRS Automated Lien System database may also be incomplete or inaccurate. Lenders must still verify the information with relevant local filing jurisdictions.
- Specific jurisdiction searches: You must know the state-specific regulations to determine if you should search at the state or county level. To uncover IRS and state tax liens, you have to inquire in various state and county offices based on where the borrower lives, does business, and owns the property.
- Inaccurate search information: Your search may not yield the right results if you get the debtor’s name wrong or fail to search for misspellings and debtor name variations.
Why you need a tax lien database to simplify your search
There's a way to conduct a more efficient search: a state and federal tax lien database.
Tax liens are public records, which means a business can routinely pull these documents and create an easily searchable database. You can use an IRS tax lien database, a state tax lien database, or an organization that offers both records in one place.
It is to your advantage to work with a partner that offers an efficient way to search federal and state tax lien databases. Look for a partner that knows exactly where to search for a tax lien and how to do it — or you might end up missing vital information to secure your interests.
Lien Solutions protects your interests with thorough tax database searches
Lien Solutions helps you perform the necessary due diligence, including a four-part search to uncover any state and federal tax lien records and UCC statements filed against the potential borrower. You’ll never miss anything with our fast, accurate multi-jurisdictional searches that yield the most current data. Contact us to make smarter lending decisions today.