The first step in understanding tax liens is to know what exactly a tax lien is. In general, a lien acts as a guarantee of the payment of a debt. When the IRS makes a legal claim over your property, it is a lien. The IRS can file a tax lien against the assets of an individual or business that fails to pay taxes owed to the government. The lien may cover assets, including financial assets, real estate, and personal property. It can also attach to business property, including accounts receivable.
How does a tax lien work?
The IRS will ask a person or entity that owes taxes to make full payment within a set time. If the IRS does not receive payment, they can file a federal tax lien. The tax lien happens when the IRS assesses how much you owe and sends you a notice of action explaining the amount owed. The notice of action will include a statement of your due process rights, such as your right to a hearing. If the IRS places a lien on your property and you believe the lien is in error, you may be able to file an appeal.
The IRS files a Notice of Federal Tax Lien. This is a public document, and its purpose is to notify creditors that the government has a claim on your assets. If you try to mortgage or sell property, it puts creditors on notice of the lien. The Notice of Federal Tax Lien is a public document and can be filed in any number of courts or agencies to alert your creditors that the government has legal rights to your property.
After the IRS files the lien is filed, they have a limited time to enforce it before it expires. Typically, the time frame is ten years, but in some cases, it is longer. In response to the coronavirus crisis, between the dates of April 1, 2020, and July 15, 2020, “new automatic, systemic liens and levies were temporarily suspended.”
People are often confused about the difference between a tax lien and a levy—a lien functions as security for the government when you fail to pay your tax debt. However, if the tax lien is not resolved, a levy allows the IRS to seize property to pay the tax liability.
What are the potential consequences of a tax lien?
If you owe back taxes and face a tax lien, there are many consequences, which may be problematic, inconvenient, or just plain embarrassing. These include:
- You can’t eliminate tax liens using a Chapter 7 or Chapter 13 bankruptcy. However, filing bankruptcy may help your situation by discharging other debts, which may allow you to pay off the tax debt eventually.
- Tax liens may not appear on credit reports anymore, but the public notice of the tax lien still alerts creditors that the government has a right to your property.
- Tax liens may be a problem if you are planning to buy, sell or refinance a home. Liens often turn up on title searches. When that happens, they usually must be removed so that the new buyer receives clear title to the property. If the owner and taxpayer want to refinance, they must ask the IRS to subordinate the lien to satisfy the first mortgage. In some cases, the IRS may agree to do that because a reduced mortgage can help the taxpayer pay the debt; however, they are not required to subordinate the lien.
- Dealing with a tax lien can be inconvenient and time-consuming. You may spend hours on hold with the automated collection system (ACS) or talking with a revenue officer..
- You can end up with a tax levy. If that happens, you could find your wages garnished, your bank accounts frozen, or even your home seized.
- When the IRS files a notice of federal tax lien, the debt becomes a matter of public record. Many people find that embarrassing for themselves and their families.
Removal of a federal tax lien
Tax liens put your financial health and security at risk. It may be tempting to ignore tax debt until the IRS takes action by placing a lien on real estate or seizing other assets. Of course, it is best to avoid a tax lien in the first place. But whether you are dreading the consequences of tax debt or already suffering the consequences, it is important to understand your legal options.
If the IRS has sent you a notice of tax lien or similar documents, your tax litigation attorney can help you file the necessary documents. They can request a hearing in order to protect the taxpayer’s right to appeal.
In some circumstances, such as an erroneous or unenforceable lien,, a lien release may be an option.
Tax liens can be intimidating and disrupt your life, so resolving the issue promptly is essential. Whether you think you are at risk of a tax lien, or you need to resolve an existing lien, you should consult an experienced tax resolution attorney as soon as possible.