IRS Gives Priority to Mechanics Liens

In a general victory for contractors and suppliers owed money on a residential project, the IRS published final regulations (TD 9520) that govern the validity and priority of federal tax liens under IRC § 6323.

Under IRC § 6321, the federal government has an automatic tax lien against any person who does not pay federal tax for which they are liable after the government demands payment. This lien extends to all that person’s property and rights to property. Section 6323 provides that a federal tax lien is only valid against certain persons if a notice of federal tax lien (NFTL) is filed; that section also generally addresses the validity and priority of federal tax liens.

Numerous amendments to section 6323 have been made since 1976 but until now have not been reflected in the regulations. The final regulations published on Monday reflect these changes to the law.

The recently enacted regulations, which became effective on April 4, 2011, specify that a federal tax lien will not supersede a valid mechanic’s lien against a personal residence in certain cases.

This regulation entitles those who file mechanics liens to higher priority and more of a chance to get the money for which they worked so hard. The draft of the relevant section is cited at length below:

(g) Residential property subject to a mechanic’s lien for certain repairs and improvements—(1) In general. Even though a notice of a lien imposed by section 6321 is filed in accordance with § 301.6323(f)-1, the lien is not valid against a mechanic’s lien or (as defined in § 301.6323(h)-1(b)) who holds a lien for the repair or improvement of a personal residence if—Show citation box
(i) The residence is occupied by the owner and contains no more than four dwelling units; andShow citation box
(ii) The contract price on the prime contract with the owner for the repair or improvement (excluding interest and expenses described in § 301.6323(e)-1) is not more than $6,890, effective for 2010 and adjusted each year based on the rate of inflation.Show citation box
(iii) For purposes of paragraph (g)(1)(ii) of this section, the amounts of subcontracts under the prime contract with the owner are not to be taken into consideration for purposes of computing the $6,890 prime contract price. It is immaterial that the notice of tax lien was filed before the contractor undertakes his work or that he knew of the lien before undertaking his work.