How IRS Liens and Federal Creditors Affect Tenancy by the Entirety

Tenancy by the entirety is one of the strongest creditor protections available to married couples in Florida. It shields jointly owned property from the creditors of either spouse individually. But that protection has a well-established limit: it does not work against the federal government.

The United States 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. This ruling fundamentally changed how married couples in Florida should think about TBE ownership when federal tax liability is present or anticipated.

This article explains how IRS liens interact with TBE property, what happens to those liens when a spouse dies, how the IRS actually collects against TBE assets, and which other federal creditors can override TBE protection.

United States v. Craft

Before Craft, the prevailing view in most federal circuits was that a federal tax lien could not attach to TBE property in states like Florida where neither spouse has a separate, divisible interest. The reasoning was straightforward: if neither spouse individually owns any property (because TBE treats the marital unit as the owner), then no individual “property or rights to property” exist for the lien to attach to under 26 U.S.C. Section 6321.

The Supreme Court rejected this reasoning in a 6-3 decision. 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 TBE. 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 while state law determines what rights a taxpayer has in property, federal law determines whether those rights constitute “property” or “rights to property” for purposes of the federal tax lien statute. Under Michigan’s TBE law (which is similar to Florida’s), each spouse possessed a meaningful bundle of rights: the right to use the property, the right to exclude others, a right of survivorship, the right to become a tenant in common upon divorce, the right to sell the property with the other spouse’s consent, and the right to a share of proceeds upon sale. The Court concluded that this bundle of rights was sufficient to constitute “property” under Section 6321.

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 the IRS Collects Against TBE Property

The IRS has three primary mechanisms for collecting against TBE property, each with different practical implications.

Levy on cash and bank accounts. The IRS can levy directly on a TBE bank account. When the IRS serves a levy on a bank, the bank is legally obligated to turn over the funds. The non-liable spouse may have an administrative or judicial claim to recover her share of the account under Sections 6343(b) or 7426 of the Internal Revenue Code, but the funds are frozen first and the dispute is resolved afterward. In practice, the IRS treats the taxpayer’s interest in TBE property as one-half of the total value, so the non-liable spouse is generally entitled to the other half. Levying on cash is the most common collection mechanism the IRS uses against TBE assets because it is simple to execute and does not require a court proceeding.

Administrative sale of property. The IRS can seize and sell the taxpayer’s interest in TBE real property or other non-cash assets through an administrative sale. However, the IRS can only sell the taxpayer’s interest, not the entire property, in an administrative sale. Because a buyer would be purchasing a fractional interest in property that the non-liable spouse also occupies or uses, these sales rarely produce meaningful proceeds. The IRS recognizes this limitation in its own Internal Revenue Manual and notes that administrative sales of TBE property present “practical problems that limit the usefulness of the Service’s seizure and sale procedures.”

Judicial lien foreclosure under Section 7403. The IRS can file a lawsuit in federal district court to foreclose on TBE property and force a sale of the entire property. Under United States v. Rodgers, 461 U.S. 677 (1983), the court has discretion to order the sale of the entire jointly owned property, even when the non-liable spouse has a protected interest. The non-liable spouse must be compensated from the sale proceeds for the loss of her share. The IRS uses this remedy on a case-by-case basis and generally reserves it for situations involving large tax liabilities.

In practice, the IRS is selective about when it pursues TBE property. The IRS typically 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 tax debt. The IRS is more aggressive with bank accounts and liquid investments, where a levy can be executed quickly and the non-liable spouse’s rights can be sorted out after the fact.

What Happens When the Taxpayer Dies

The most important practical question about IRS liens on TBE property is what happens when the taxpayer spouse dies. The answer depends on which spouse dies first.

If the taxpayer dies first, the TBE property passes to the surviving non-liable spouse by operation of law. No deed, assignment, or probate proceeding is required. The taxpayer’s interest in the property is extinguished at death, and the surviving spouse owns the property in fee simple. Because the taxpayer no longer has any interest in the property, there is nothing for the federal tax lien to attach to. The IRS’s own collection guidelines, confirmed in IRS Notice 2003-60, state that when the taxpayer predeceases the non-liable co-owner, the tax lien ceases to attach to the property.

This is a critical planning point. If the taxpayer spouse is likely to die first (due to age or health), the TBE property may pass to the surviving spouse free of the IRS lien, provided the ten-year collection statute of limitations has not been extended and the IRS has not already filed a foreclosure action.

If the non-liable spouse dies first, the TBE is terminated and the taxpayer becomes the sole owner of the property in fee simple. The federal tax lien then attaches to the full value of the property, not just the one-half interest. The property becomes fully available for IRS collection, with no spousal interest to protect.

If the property is transferred before death, the result changes. If TBE property subject to an IRS lien is sold or transferred to a third party (or to the non-liable spouse alone) without obtaining a discharge of the lien, the lien encumbers a one-half interest in the hands of the transferee. The lien follows the property regardless of who holds it, and the subsequent death of either spouse does not affect the lien once the TBE has already been terminated by the transfer.

The Ten-Year Collection Period

Federal tax liens do not last forever. Under 26 U.S.C. Section 6502, the IRS has ten years from the date of assessment to collect an unpaid tax liability. After the collection statute expires, the lien is released and the IRS can no longer pursue the property.

For married couples with TBE assets, the ten-year period creates a planning horizon. If the taxpayer spouse can maintain TBE ownership of the property for the full collection period without triggering a sale or transfer, and the IRS does not obtain a court judgment extending the period, the lien will expire and the property will be free of the tax claim.

The IRS can extend the ten-year period in certain circumstances, including by obtaining a court judgment, through a taxpayer’s agreement to extend the statute (which the IRS may request as a condition of an installment agreement), or through the filing of a bankruptcy petition by the taxpayer.

Other Federal Super-Creditors

The IRS is the most common federal creditor that can reach TBE property, but it is not the only one.

Securities and Exchange Commission (SEC). The SEC can obtain federal judgments that override state exemptions, including TBE. Courts have held that the SEC can force the liquidation of TBE assets and is entitled to the debtor spouse’s share of the proceeds.

Federal Trade Commission (FTC). The FTC exercises similar authority in fraud and consumer protection cases. Federal court orders in FTC enforcement actions can reach TBE property.

Department of Justice (DOJ) criminal forfeiture. Federal criminal forfeiture statutes under 21 U.S.C. Section 853 allow the government to seize property involved in or derived from criminal activity, including property held as TBE. Florida courts have confirmed that TBE ownership does not protect property from criminal forfeiture under federal law. In one Florida case, the government was ordered to liquidate the property and allocate 50% of the net proceeds to the defendant’s spouse.

Federal student loans. The Department of Education and its collection agents can garnish wages and bank accounts through administrative processes that do not require a court judgment. Whether these administrative garnishment powers extend to TBE bank accounts in full-bar states like Florida is less settled than with IRS liens, but the federal government’s position is that federal collection authority preempts state exemptions.

Practical Implications for Asset Protection Planning

The federal super-creditor exception means that TBE ownership is not a complete asset protection strategy when federal liability is present or anticipated. For couples facing potential IRS debt, SEC enforcement, or other federal claims, additional planning is necessary.

Federal Creditor	Can Reach TBE?	Collection Method	Non-Liable Spouse Rights
IRS (income tax)	Yes, per Craft	Levy, administrative sale, Section 7403 foreclosure	Entitled to 50% of proceeds
SEC	Yes	Federal court order	Entitled to 50% of proceeds
FTC	Yes	Federal court order	Entitled to 50% of proceeds
DOJ (criminal forfeiture)	Yes	21 U.S.C. § 853	Entitled to 50% of proceeds
Private civil creditors	No	Cannot reach TBE property	Full protection

For couples where one spouse has an IRS tax liability, the critical variable is the order of death. If the taxpayer spouse is expected to predecease the non-liable spouse, maintaining TBE ownership may ultimately protect the property because the lien extinguishes at the taxpayer’s death. If the non-liable spouse is expected to die first, TBE provides no long-term protection because the property will vest entirely in the taxpayer.

Couples with active IRS collection issues should not transfer TBE property to the non-liable spouse alone, as this terminates the TBE and causes the lien to encumber a one-half interest in the transferee’s hands. The property is better left as TBE, where at least the non-liable spouse retains her possessory rights and the possibility that the taxpayer will predecease her.

For a comprehensive overview of TBE protection, see the Tenancy by the Entirety in Florida guide. Couples concerned about how divorce affects TBE property should review the TBE and Divorce article, as divorce immediately terminates TBE and can create exposure to both private and federal creditors.