Priority is the question that matters when property is sold, foreclosed or refinanced and the money does not cover everyone. The mortgage lender, the judgment creditor, the contractor, the county tax collector and the IRS all want to be first. Somebody has to be second.
Federal lien priority looks complicated because it combines a federal statute, state law definitions and a doctrine built by the Supreme Court. Broken down, it is a small number of rules applied in order.
Rule 1: against the taxpayer, the IRS lien dates from assessment
Between you and the IRS, priority is not a question. Under IRC 6322 the lien arises at assessment and binds all of your property and rights to property. The rest of this page is about third parties competing for the same property.
Rule 2: four protected classes need a filed notice
IRC 6323(a) says the federal tax lien is not valid against any purchaser, holder of a security interest, mechanic's lienor or judgment lien creditor "until notice thereof which meets the requirements of subsection (f) has been filed." IRM 5.17.2.6 restates it: if one of those parties perfects its claim before the notice is filed, that claim is entitled to priority over the tax lien.
So for these four classes the race is simple. Compare the date the competing interest was perfected under state law with the date the IRS properly filed its notice. Earlier wins, subject to the exceptions below.
Two details make this rule stronger than it looks:
- Actual knowledge does not matter. According to IRM 5.17.2.6, the protected classes are protected against unfiled notices "notwithstanding actual knowledge of the statutory assessment lien."
- The notice must be in the right place. IRM 5.17.2 says that if the IRS files in the wrong office, the lien does not have priority over a later purchaser, security interest holder, mechanic's lienor or judgment lien creditor. See where the IRS files tax lien notices.
What it takes to qualify as protected
Each class has a definition, and a creditor that does not meet it gets no protection.
Holder of a security interest
Section 6323(h)(1) says a security interest exists only if, at that time, the property is in existence, the interest is protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and the holder has parted with money or money's worth. IRM 5.17.2.6.4 notes that a creditor who fails to perfect under the Uniform Commercial Code loses to the federal tax lien. A loan commitment that has not been funded is not yet a security interest to the extent of the unfunded amount.
Purchaser
Under section 6323(h)(6), a purchaser must give adequate and full consideration and acquire an interest valid under local law against later purchasers without notice. IRM 5.17.2.6.1 says the price must bear a reasonable relationship to value, though a bona fide bargain purchase still counts. Gifts do not.
Judgment lien creditor
IRM 5.17.2.6.2 says a judgment lien creditor must have a valid judgment from a court of record and competent jurisdiction, and a perfected lien in which the identity of the lienor, the property subject to the lien, and the amount are established. If state law requires recording the judgment, or a levy on personal property, to create a lien good against third parties, those steps must happen before the notice is filed.
Mechanic's lienor
Section 6323(h)(2) defines a mechanic's lienor as a person with a local-law lien on real property, or contract proceeds relating to real property, for services, labor or materials for construction or improvement. The lien dates from when it becomes valid under local law against later purchasers without notice, but not before the work or materials begin.
Rule 3: some interests beat the IRS even after a notice is filed
Congress carved out "superpriorities" in section 6323(b). These protect interests that arise after the notice is filed, such as certain purchasers of securities and motor vehicles, retail buyers, property tax liens, repairmen in possession, attorneys' liens in some settlements, and certain insurance and deposit-secured loans. Each is covered in the superpriority exceptions.
Section 6323(c) and (d) add protection for certain financing arrangements entered into before the notice was filed, including a 45-day window for some business lending. See the 45-day rule for business lenders.
Section 6323(e) extends a protected interest's priority to related items to the extent local law gives them the same priority, such as interest on the secured obligation, reasonable collection costs including attorney's fees, and costs of insuring, preserving or repairing the property.
Rule 4: everyone else is judged by "first in time"
Section 6323 does not address every competing claim. A state income tax lien, a landlord's lien, an attachment lien before judgment: none of these is one of the four protected classes. For those, IRM 5.17.2.7 explains that courts use the choateness test developed by Supreme Court case law. It is a federal test, not a state one.
Under that test, the lien first in time is first in right. The federal tax lien is treated as choate, meaning complete, on the assessment date, and the filing of a notice is irrelevant to this comparison. A competing state-created lien wins only if it was choate before the federal lien arose, which the IRM says requires three things: the identity of the lienor, the property subject to the lien, and the amount of the lien must all be established.
The manual gives examples. A prejudgment attachment lien is treated as inchoate until perfected by a final judgment. A landlord's lien for unpaid rent was held inchoate until the landlord obtained a judgment, because the amount could change. State and local tax liens that attach to all property can be choate when the lienor is known, the amount is finally fixed, and the lien attaches by statute so the state can enforce it without substantial further steps.
Real property taxes are a special case. They get a statutory superpriority under section 6323(b)(6) when local law gives them priority over earlier security interests. Other state and local taxes, such as income or sales taxes, have to win under the first-in-time test, according to IRM 5.17.2.
Putting it in order
- Is the competing claim a superpriority under section 6323(b)? If so, it generally beats the IRS even after a notice was filed.
- Is it protected by the financing rules in section 6323(c) or (d)? Check the agreement date and the 45-day window.
- Is it a purchaser, security interest, mechanic's lien or judgment lien perfected before the IRS properly filed its notice? If so, it generally wins.
- If it is some other lien, was it choate before the federal assessment? If not, the federal lien wins.
The documents that decide priority
Every priority question comes down to dates on documents. Gather the recorded notice of lien with its recording date and office, the assessment dates from the transcripts, the competing creditor's mortgage, UCC filing or judgment with its recording date, and any loan agreement that predates the notice. With those in hand, most priority disputes answer themselves.
How priority affects you
As the taxpayer, you are not a party to the priority race, but you live with its results. Priority determines whether a lender will lend, what a buyer will pay, and how sale proceeds are split. It also explains why the IRS cares about its notice. Withdrawal of the notice, discussed in the secret lien versus the public notice, costs the IRS priority against third parties, which is exactly why the manual weighs it carefully. Subordination is the tool that rearranges priority by agreement for a specific transaction.
Priority is a race, and the starting gun is the filing date for most players and the assessment date for the rest.