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 the protection does not extend to federal creditors. 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 federal exception applies to the IRS, the SEC, the FTC, and the Department of Justice. 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 those rights were sufficient to constitute “property” under the federal tax lien statute.

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, not the entire property. A buyer would be purchasing a share in property the non-liable spouse also occupies, so these sales rarely produce meaningful proceeds. The IRS’s own Internal Revenue Manual acknowledges that administrative sales of entireties property present practical problems that limit their usefulness.

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), the court has discretion to order the sale even when the non-liable spouse has a protected interest, but the non-liable spouse must be compensated from the proceeds for the loss of her share. The IRS reserves this remedy for large tax liabilities and uses it selectively.

For a primary residence, there is an additional safeguard. 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 extinguishes. It is the most consequential variable in planning around a federal tax lien on TBE property.

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 terminates and the taxpayer becomes the sole owner of the property in fee simple. The federal tax lien then attaches to the full value, not just one-half. 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 causes the lien to encumber a one-half interest held by the transferee. The lien follows the property regardless of who holds it, and the death of either spouse no longer affects the lien once the TBE has been terminated.

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. The lien must not have been extended beyond the ten-year collection period, and the IRS must not have already filed a foreclosure action.

How Long Does an IRS Lien Last?

Under 26 U.S.C. § 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 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.

Three events can extend the ten-year period: a court judgment, a taxpayer’s agreement to extend the statute (often requested as a condition of an installment agreement), or the filing of a bankruptcy petition. Agreeing to extend the statute when negotiating an installment agreement is a trade-off that couples with TBE assets should evaluate carefully, because it lengthens the window during which the non-liable spouse’s death could expose the property.

What Other Federal Creditors Can Reach TBE Property?

Federal creditors other than the IRS can also override state-law TBE protection, because federal collection authority preempts state exemptions under the Supremacy Clause.

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, with the debtor spouse’s share of the proceeds going to satisfy the judgment.

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

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. Florida courts have confirmed that TBE ownership does not block criminal forfeiture under federal law. In at least one Florida case, the government liquidated the property and allocated 50% of the net proceeds to the defendant’s spouse.

Federal student loans. The Department of Education 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.

Federal Creditor	Can Reach TBE?	Collection Method	Non-Liable Spouse Rights
IRS (income tax)	Yes, per Craft	Levy, administrative sale, § 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

How TBE Property Is Treated in Bankruptcy

TBE protection interacts differently with federal tax liens in bankruptcy. Under 11 U.S.C. § 522(b)(3)(B), a debtor can exempt TBE property to the extent that interest would be exempt from creditors under nonbankruptcy law. For private creditors, this means 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 property is not exempt from the bankruptcy estate to the extent of the IRS debt. The bankruptcy trustee does not need to step into the IRS’s shoes or use special powers. The fact that the IRS is an actual creditor with collection rights over TBE property is enough to defeat the exemption.

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 then encumbers a one-half interest in 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.

The non-liable spouse has several procedural protections. 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.