Negative Effects of Tax Liens on 3rd Parties

The tax lien has advanced to represent an instrument unparalleled in its uniqueness to the United States. It brings to the fore the very nature of taxation and raises issues of inequity and greed when wealth is concentrated in a small sector of the community as a result of taxes being applied unfairly. Apart from the legal consequences tax liens are able to inflict on mortgagees and other lien holders of a property, electronic advances in the recording of lien certificates are making their presence felt.

Tax Theory Doesn’t Work in the Real World
Tax liens are derived from the statutory right of governments to administer taxes to fund the needs of the public at large. The incidence of taxation is never perfect, and often it is found to burden some members of the community more than others in disproportionate manner. Principles of progressive taxation for example, extend a bias against the wealthy, and that of regressive taxation places a heavier burden upon the poor. Ideally, proportional taxation is to be pursued however, in an imperfect world of competing interests, this has proven to be found only with respect to an individual tax at very most.

The situation where wealth is concentrated in a minority of individuals, in its extreme, is vigilantly avoided to prevent the dilapidating effects it would have on the well being of society. In general the taxation systems of modern governments struggle to find a uniform method of application where all citizens are taxed fairly and devoid of others expense.

Consequently, a tax lien imposed on a property for failure to pay the required taxes, if sold to a third party, in its perfect state, redirects wealth to the holder of the lien, at the expense of not only the delinquent taxpayer, but the community as a whole, who at its worst application, may suffer the social effects of abandoned vacant land, property prices that spiral downward, and most fundamentally, the fiscal deterioration of the governing authority.

Even though mortgagees are deemed in law to have an interest in property, the existence of which demands notice of tax lien being placed upon that property, the Federal Court has left the issue of when notice is required quite vague. This has resulted in the plethora of jurisdictions within the United States, each having formed their own interpretation of the Federal Court decision, and exercising this interpretation with respect to bankruptcy and foreclosure proceedings coming within the ambit of their respective courts.

Effectively, the security of mortgagees and other holders of a lien on a particular property may be at risk, particularly if the procedural requirements of filing and searching have been overlooked, and this will be invariably due to the fact that taxes owed to the government take precedence over other creditors. This view, however justified, ignores the reality that the mortgagee if it had been notified would be by definition, the most competitive purchaser of a lien over property on which it held a mortgage, purely in order to protect its security from the claims of another creditor.

Privacy, Piracy and Tax Records on the Internet
With an increasing number of municipalities recouping lost taxes through the vehicle of a tax lien, the tax lien market is thriving to such an extent that the administration of taxation using a paper based system can be no more. The requirement to follow due process necessitates liens to be filed and researched thoroughly by all parties, not the least of which is the taxation authority itself, and so an electronic system of recording may be implemented in the near future, courtesy of a bill introduced by the Senate in 2007.

Clearly the introduction of technological advances will reduce costs over time, but the implementation of a scheme of such magnitude is not without onerous financial expense to the government, the beneficiaries of which are citizens.

The personal details of individuals who have been unfortunate enough to have a tax lien placed upon their property are specifically detailed upon a the lien certificate, and with the advent of an electronic system as suggested by the Senate, identity theft may be rife taking advantage of the convenient access to information afforded by the internet.
Thankfully, but with unavoidable public expense, steps to prevent this intrusion are being taken, and the social security numbers, dates of birth and the addresses of individuals are being deleted from public records.

However, the evolution of the tax lien system now faces the intrigue and challenge of facilitating the verification of a tax lien, and its subsequent validation to all users of the tax lien vehicle. This is an integral component of the market’s continued existence.

In addition if the accessibility needed to validate tax liens is denied, numerous commercial databases will suffer as they no longer have a useful product to offer the prospective purchaser of lien.

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