How IRS Liens and Federal Creditors Affect Tenancy by the Entirety

Tenancy by the entirety shields jointly owned property from the creditors of either spouse individually, but it does not stop the IRS. The Supreme Court held in United States v. Craft, 535 U.S. 274 (2002), that a federal tax lien can attach to TBE property even when only one spouse owes the tax.

The exception is settled for the IRS and for federal criminal forfeiture. An Eleventh Circuit decision stopped the FTC. Whether the SEC can reach entireties property has never been decided. For married couples in Florida who face or anticipate federal liability, TBE ownership alone is not enough.

The United States v. Craft Decision

The Supreme Court ruled in 2002 that the IRS can attach a federal tax lien to entireties property even when only one spouse owes the tax. The decision reversed decades of lower-court protection for TBE assets in full-bar states like Florida, where neither spouse holds a separate, divisible interest.

The case involved Don Craft, who owed over $482,000 in unpaid federal income taxes. He and his wife Sandra owned property in Michigan as tenants by the entirety. After the IRS filed a lien, the Crafts executed a quitclaim deed transferring Don’s interest to Sandra for one dollar.

The Court held that state law determines what rights a taxpayer has in property, but federal law determines whether those rights constitute “property” or “rights to property” under 26 U.S.C. § 6321. Michigan’s TBE law, similar to Florida’s, gave each spouse meaningful rights, including occupancy, exclusion, survivorship, and the ability to sell jointly. The Court concluded that the husband’s interest, made up of those rights, was “property” under the federal tax lien statute. It said that the rights to use, exclude, and take income might be enough on their own.

Before Craft, most federal circuits held that a tax lien could not attach to TBE property in full-bar states. The reasoning was that neither spouse individually owned anything; the marital unit held title. The Supreme Court rejected that reasoning in a 6-3 decision. After Craft, the IRS can attach a federal tax lien to TBE property in every state that recognizes TBE, regardless of how state law characterizes the individual spouse’s interest.

How Does the IRS Collect Against TBE Property?

The IRS uses three collection methods against TBE property, each with different consequences for the non-liable spouse.

Levy on bank accounts and cash. The IRS can levy directly on a TBE bank account. When the IRS serves a levy on a bank, the bank must turn over the funds. The IRS treats the taxpayer’s interest as one-half of the total value, so the non-liable spouse is generally entitled to the other half.

The non-liable spouse can file an administrative claim under IRC § 6343(b) or a judicial claim under IRC § 7426 to recover her share, but the funds are frozen first and the dispute is resolved afterward. Bank levies are the most common IRS collection method against TBE assets because they do not require a court proceeding.

Administrative sale. The IRS can seize and sell the taxpayer’s interest in TBE real property through an administrative sale. The IRS can only sell the taxpayer’s fractional interest. A buyer would be purchasing a share in property the non-liable spouse also occupies, so these sales rarely raise much money.

Judicial lien foreclosure under IRC § 7403. The IRS can file a lawsuit in federal court to foreclose its lien and force a sale of the entire property. Under United States v. Rodgers, 461 U.S. 677 (1983), a court has discretion to order the sale even when the non-liable spouse has a protected interest. That spouse is entitled to complete compensation out of the proceeds for the interest she loses, valued as the court finds it. The IRS reserves this remedy for large tax liabilities and uses it selectively.

Under IRC § 6334(e)(1), the IRS must obtain written approval from a federal district court judge or magistrate before seizing a taxpayer’s principal home. The IRS generally does not force the sale of a family home held as TBE, though the lien clouds the title and prevents the couple from selling or refinancing without addressing the debt.

What Happens When a Spouse Dies?

The order of death determines whether the IRS lien survives or is extinguished.

If the taxpayer dies first, the TBE property passes to the surviving non-liable spouse by operation of law. No deed, probate, or transfer document is required. The taxpayer’s interest is extinguished at death, leaving nothing for the federal tax lien to attach to. IRS Notice 2003-60 confirms that when the taxpayer predeceases the non-liable co-owner, the tax lien ceases to attach to the property.

If the non-liable spouse dies first, the tenancy by the entirety terminates and the taxpayer becomes the sole owner of the property in fee simple. The federal tax lien then attaches to the full value. The property becomes fully available for IRS collection with no spousal interest to protect.

If the property is transferred before death, the result changes again. Selling or transferring TBE property without obtaining a discharge leaves the lien attached to the taxpayer’s interest in the hands of whoever takes the property. Courts have not fixed that interest at a set share; its value is decided case by case. Once the tenancy by the entirety has been terminated, the death of either spouse no longer affects the lien.

For couples where the taxpayer spouse is likely to predecease the non-liable spouse (due to age or health), maintaining TBE ownership may protect the property. That protection holds only if the lien has not been extended beyond the ten-year collection period and the IRS has not already filed a foreclosure action.

How Long Does an IRS Lien Last?

A federal tax lien on TBE property lasts ten years from the date the IRS assesses the tax. That deadline is set by 26 U.S.C. § 6502. When the deadline passes, the lien comes off the property and the IRS can no longer collect the debt.

If the taxpayer spouse maintains TBE ownership for the full collection period without triggering a sale or transfer, and no court judgment extends the deadline, the lien expires and the property is no longer encumbered.

A timely collection suit extends the ten-year period until the judgment is satisfied or becomes unenforceable. A bankruptcy filing pauses the clock. So does a Tax Court petition, an unbroken six months or more outside the United States, or a court taking custody of the taxpayer’s assets. A taxpayer can also agree in writing to extend the period when signing an installment agreement, which lengthens the window during which the non-liable spouse’s death could expose the property.

What Other Federal Creditors Can Reach TBE Property?

Among federal creditors other than the IRS, only criminal forfeiture has clearly overridden Florida’s entireties protection. Courts have not extended Craft‘s reasoning past the IRS’s own collection powers, and the Eleventh Circuit has refused to let the FTC reach an innocent spouse’s entireties home.

Securities and Exchange Commission (SEC). No court has held that the SEC can reach Florida entireties property to satisfy one spouse’s liability. A federal judge in Florida said in SEC v. Solow (S.D. Fla. 2010) that a disgorgement order need not respect state entireties protection. The court reached the money through contempt against the defendant rather than by seizing the property, and it acknowledged that the question is unsettled.

Federal Trade Commission (FTC). The Eleventh Circuit vacated the FTC’s attempt to reach a Florida couple’s entireties home in McGregor v. Chierico, 206 F.3d 1378 (11th Cir. 2000). The innocent spouse’s entireties rights made the liable spouse’s interest unreachable through the court’s contempt power. Where both spouses are liable, a joint judgment reaches entireties property under ordinary Florida law.

Department of Justice criminal forfeiture. Federal criminal forfeiture statutes under 21 U.S.C. § 853 allow the government to seize property involved in or derived from criminal activity, including property held as TBE. The Eleventh Circuit held in United States v. Fleet, 498 F.3d 1225 (11th Cir. 2007), that the provision allowing the government to forfeit substitute property overrides both Florida’s homestead exemption and Florida entireties law.

Federal student loans. Without a court judgment, the Department of Education cannot reach a bank account. Its administrative powers let it garnish no more than 15% of disposable pay and intercept federal payments. Even with a judgment, federal law limits what the government can take from co-owned property to what state law allows. In Florida that leaves a TBE account out of reach when only one spouse owes the debt.

Federal Creditor	Can Reach TBE?	Collection Method	Non-Liable Spouse Rights
IRS (income tax)	Yes, per Craft	Levy, administrative sale, § 7403 foreclosure	Complete compensation for the interest lost, as the court values it
SEC	Unsettled	Contempt pressure in disgorgement cases	Untested in Florida
FTC	No, per Chierico	Attempt vacated on appeal	Full protection where the spouse is innocent
DOJ (criminal forfeiture)	Yes	21 U.S.C. § 853	Only the defendant’s interest is forfeited, with no innocent-spouse defense
Private civil creditors	No	Cannot reach TBE property	Full protection

How TBE Property Is Treated in Bankruptcy

A Florida debtor can keep TBE property out of a bankruptcy estate to the extent nonbankruptcy law puts the debtor’s interest beyond the reach of creditors. The Bankruptcy Code makes that exemption available at 11 U.S.C. § 522(b)(3)(B). Against private creditors of one spouse, TBE property passes through bankruptcy untouched.

When the IRS is an actual creditor in the bankruptcy case, the analysis changes. Because Craft allows the IRS to reach TBE property outside bankruptcy, several courts have held that the exemption fails to the extent of the IRS debt, and the trustee administers the property for those claims alone. The trustee cannot borrow that power when the IRS is not in the case. A bankruptcy filing does not hand a trustee the collection rights the Internal Revenue Code gives the government.

What Couples Should Know During IRS Collection

Unlike private civil creditors, the federal government can pursue criminal charges against a taxpayer who attempts to evade payment. Under 26 U.S.C. § 7206, concealing assets or making false statements to the IRS is a felony. The same is true for criminal restitution obligations, where hiding or transferring assets to avoid a court-ordered payment can result in additional criminal penalties. Asset protection strategies that are routine against civil judgment creditors can constitute obstruction or fraud when the creditor is the IRS or a federal court enforcing a criminal sentence.

Couples with active IRS collection issues should not transfer TBE property to the non-liable spouse alone. That transfer terminates the TBE, and the lien follows the taxpayer’s interest into the transferee’s hands. The property is better left as TBE, where the non-liable spouse retains possessory rights and the possibility that the taxpayer will predecease her.

If the IRS levies a TBE bank account, the non-liable spouse can file a wrongful levy claim under IRC § 6343(b) within two years to recover funds that belong to her. If the IRS still holds the specific property rather than having applied it to the debt, there is no time limit on the claim, but delay complicates recovery.