A tax lien is a legal claim against the assets of an individual or business that fails to pay taxes owed to the government. In essence, a lien ensures payment of a debt, in this case, unpaid taxes. If unresolved, the government may seize the assets involved.
Key Takeaways
- If a taxpayer does not respond to a demand for payment, the government may place a lien on their assets.
- The lien may be removed if the taxpayer agrees to a payment plan or takes other actions with the government’s consent.
- If no effort to repay is made, the government may seize and sell the assets.
What is a Tax Lien?
Governments at various levels can place a lien on property for unpaid taxes. A lien does not automatically mean a property will be sold, but it ensures the tax authority gets first claim over other creditors on the assets.
The Process of a Tax Lien
Step 1: Notice and Demand for Payment
The process begins when a taxpayer receives a letter detailing the owed amount, known as a notice and demand for payment.
Step 2: Response and Loan
If the taxpayer does not pay or resolve the debt, the government can place a lien on all the taxpayer’s assets, including properties, securities, and vehicles. The lien also extends to any assets the taxpayer acquires while the lien is in place.
Step 3: Bankruptcy
Even in bankruptcy, a federal tax debt lien can persist as federal tax debt does not get wiped out by bankruptcy proceedings.
What the IRS Can Do
In the U.S., the IRS may place a lien against a taxpayer’s home, vehicle, and bank accounts if federal tax payments are delinquent. A federal tax lien takes precedence over other creditors’ claims, making it difficult for the taxpayer to sell assets or obtain credit.
The only way to release a federal tax lien is to fully pay the owed tax or reach a settlement with the IRS. Tax liens used to appear on credit reports, damaging the credit score, but has changed post-2018 where major credit reporting agencies no longer include tax liens on credit reports.
If the taxes remain unpaid, the tax authority can use a tax levy to legally seize the taxpayer’s assets to collect the amount owed. A lien secures the government’s claim, while a levy permits the government to seize and sell the property.
Getting Out of a Tax Lien
The simplest way to clear a federal tax lien is to pay the taxes owed. After payment, the county records are updated to reflect the lien release.
Other Strategies
- Payment Plan: The IRS may release a lien if the taxpayer agrees to a payment plan with automatic monthly withdrawals.
- Discharge: Certain taxpayer properties may qualify for discharge from the lien. IRS Publication 783 provides guidelines for property discharge.
- Subordination: Doesn’t remove the lien but can make it easier to get another mortgage or loan. File IRS Form 14134 to apply.
- Withdrawal of Notice: Removes the public notice of a federal tax lien. Taxpayers remain liable, but the IRS doesn’t compete with other creditors for the debtor’s property. File Form 12277 to apply.
As a last resort, the taxpayer may seek dismissal of outstanding balance through bankruptcy if repaying the taxes in full is impossible.
Can Tax Liens Be Purchased?
In some states, public tax debt may be auctioned off through tax lien sales, allowing third-party investors to purchase them. Property owners will then owe the taxes plus interest to the lien purchasers.
How Long Can Property Taxes Go Unpaid?
The duration one can remain delinquent varies by state, but property owners generally have around two years before foreclosure.
Where Do I Find Liens?
Individuals can determine active liens on their properties through local or state record offices or the attorney general’s repositories. IRS’s Automated Lien System can find liens against businesses.
The Bottom Line
A tax lien is a government claim on one’s assets for unpaid tax debts, distinct from a tax levy, which is when the government actually seizes property. Resolving tax liens involves either paying the owed amount in full or negotiating a settlement with the taxing authorities.
Related Terms: Tax Levy, Bankruptcy, Credit Report, Property Taxes, Credit Score.
References
- Internal Revenue Service. “Understanding a Federal Tax Lien”.
- Experian. “Tax Liens Are No Longer a Part of Credit Reports”.
- Internal Revenue Service. “Additional Information on Payment Plans”.
- Internal Revenue Service. “Instructions on How to Apply for Certificate of Discharge from Federal Tax Lien”.
- Internal Revenue Service. “Instructions on How to Apply for a Certificate of Subordination of Federal Tax Lien”.
- Internal Revenue Service. “Understanding a Federal Tax Lien”.
