An IRS tax lien, or federal lien, is a legal claim the government places on a taxpayer’s property when they neglect or fail to pay their tax debt. A lien secures and protects the government’s interest in all your assets, including real estate, bank accounts, and even future earnings, until the debt is resolved.
If you’re at risk of failing to pay your business taxes, understand that tax liens can negatively impact you and/or your business. Liens will hurt your personal and business finances, damage credit, and put your personal and business assets in danger. It’ll make it almost impossible to secure loans, refinance existing loans, transfer business or personal assets, or even sell your properties or business. In extreme cases, ignoring an IRS tax lien can have even more severe consequences as it counts as debt neglect and, if suspected, can result in seizing your assets for sale.
At Victory Tax Lawyers, we have the best tax lawyers to help taxpayers who find themselves in the bad books of the IRS get by. We have handled tax lien cases successfully, using our expert negotiation skills to get our clients a favorable tax debt settlement. We offer a free tax attorney consultation to give you a professional insight into your tax issue with an upfront cost.
This post will explain what a tax lien is and how it affects you. We’ve also found that most taxpayers mistake a tax lien for a tax levy, you’ll learn the difference between the two in this article.
What Is an IRS Tax Lien & How Does It Affect You?
A federal tax lien is a charge by the government on a taxpayer’s property that arises when they fail or refuse to pay a tax debt after notice and demand. According to the Internal Revenue Code(IRC) § 6321, a tax lien covers all of the taxpayer’s property or right to property to secure payment of tax liability.
When the IRS places a tax lien, it must first issue a Notice of Federal Tax Lien, which notifies creditors that the federal government is placing a lien on a taxpayer. The notice will include the amount of taxes owed, interest, the cost of preparing and mailing the notice, and the deadline for payment. If the account remains unpaid by the deadline, a tax lien is filed on you and what you own. Once this happens, interest increases to 14% per annum.
While people often mistake the two, it’s important to note that a lien is not a levy. A lien is a legal claim against a property to secure tax liability, while a levy actually takes the property to satisfy the tax debt. In other words, unlike a tax levy, a lien does not transfer the ownership of your property to the government.
What Happens If the IRS Puts a Tax Lien on You?
Unpaid taxes can lead to a tax lien, and a tax lien can result in severe consequences, including:
1. The Lien Attaches to Your Assets
Here’s the thing with liens: once a lien is filed, it attaches to all of your existing personal and business assets, even future assets, as long as the lien is still in effect. In essence, the lien stakes a claim in what you own until it is removed.
2. It Becomes Public Record
Liens are a matter of public knowledge. Once you fail to pay your taxes, the IRS files an NFTL with your local county or state. This automatically puts out the word that you owe Uncle Sam. The implication is that it may make things a little complicated for you, especially if you’re hoping to apply for a mortgage, business loan, or certain jobs that require financial responsibility.
3. Your Credit and Borrowing Power Are Affected
Getting loans, refinancing, or opening new credit lines are generally more difficult when a lien is in place. While tax liens no longer show up on consumer credit reports, they are still very much available in public records, which banks and lenders check before approving loans.
Lenders naturally do not like financing high-risk individuals. When a lender sees a tax lien in public records, they may reject your loan application right away, charge you higher interest rates, or demand that you put down a larger down payment. Even if you qualify for a loan, you’ll likely end up paying more just because the IRS has a claim on your assets.
4. Selling or Transferring Property Becomes Complicated
Selling your house or refinancing your mortgage with a lien claim is another level of hard. Since the IRS has a legal claim on your property, any sale proceeds must first go toward paying your tax debt before you can get a profit. Many buyers and lenders won’t touch a property with an active tax lien because it’s risky. If you need to sell your home but have a lien, you may have to:
- Negotiate with the IRS for a lien discharge (which isn’t always easy)
- Convince a buyer to take on the hassle (which is highly unlikely and nearly impossible)
- Pay off your tax debt first (which may not be possible if you’re in financial trouble)
5. The IRS May Take Further Collection Actions
A lien is really just the beginning. If your federal taxes remain unpaid, the IRS can escalate their collection efforts and go ahead to levy your bank accounts, garnish your wages, and even seize your business property to satisfy the tax debt. Addressing the lien promptly can help prevent more severe enforcement actions.
When Does the IRS File a Tax Lien?
Taxpayers often wonder when the IRS files a lien. Here’s the simple answer: the IRS will not file a tax lien without sending you a notice of unpaid taxes, telling you how much you owe first. Let’s break it down.
Liens are often not the IRS’s first resort when a taxpayer fails to meet up with their tax obligations. In fact, liens are only filed after a taxpayer has been duly warned and given the opportunity to respond. Unfortunately, the thing with liens is once they’re in place, removing them can be a long and difficult process. This is why you want to respond swiftly to debt notices from the IRS.
Your response when you receive an IRS tax debt notice should be one of two things: either paying up your tax debt in full or reaching out to the IRS for verification to verify the accuracy of the notice if you suspect an error. Delaying action can lead to more complications, including additional penalties and collection actions.
Here’s the typical timeline an IRS tax lien follows:
- The IRS will let you know that you have unpaid federal taxes via a Notice of Deficiency. This is also known as a 90-day letter because it gives you 90 days to pay what you owe. You can either respond by paying your debt in full, exploring alternative payment options, or filing your tax return if you disagree with the IRS assessment.
- If you fail to respond to the previous notice by making payments before the 90-day window, the IRS will automatically create a Notice of Federal Tax Lien (NFTL), which is a public notice alerting creditors of the government’s legal right to property. The IRS isn’t necessarily obliged to file an NFTL, but doing so allows the IRS to have precedence over other creditors.
- Tax liens are typically reserved for tax debts of $10,000 or more. If you owe this amount, the IRS can file a tax lien as early as 10 days after sending you a notice of unpaid taxes. Even if it’s less than $10,000, if the need to collect is urgent, they may still issue a tax lien.
How Do You Know If You Have an IRS Tax Lien?
If you’re unsure if a tax lien has been filed against you, here are some steps you could take to find out:
- Contact the IRS Centralized Lien Unit: The first way to confirm whether or not you have a tax lien is to call the IRS Centralized Lien Unit at 800-913-6050 or e-fax 855-390-3530. They can provide direct confirmation and details regarding any lien placed against you. If no lien has been filed yet but you suspect one may be filed soon, immediately log into your IRS account, check your current balance, and pay it off to prevent further IRS action.
- Look for an IRS Notice of Federal Tax Lien (NFTL): The IRS sends a formal notice when they place a lien on your assets. If you owe back taxes and a lien has been filed, you would have received this notice by mail. So, carefully check your IRS correspondence to confirm the receipt of the notice.
- Review Your Tax Records: If you prefer to verify the lien status yourself, log into your IRS online account and check for outstanding tax debts. You can also request a transcript of your tax account (online or by mail). It will show any current liens. If you see a balance due, immediately clear it up so that the IRS doesn’t file a lien against you.
- Check Public Records: The IRS files tax liens with local government offices, usually at the county or state level. You can search your county recorder’s office or the secretary of state’s website to see if a lien has been placed against you. Some legal databases also provide lien status information for a fee.
- Monitor Your Credit Report: While tax liens no longer appear on consumer credit reports, financial institutions can still access lien information in some cases. If you tried securing a loan or refinancing and were denied, this may be a sign that a tax lien is affecting your financial standing. A lien won’t affect your credit score, but since it’s public information, it may affect lenders’ perceptions of your creditworthiness which in turn could affect your ability to obtain credit.
- State & Local Tax Liens: The IRS isn’t the only agency that can file a lien, state and local governments can also place liens on your property for unpaid state taxes. If you suspect a state tax lien, check with your county office or state tax authority. For example, in California, taxpayers can set up a payment plan for a $34 fee, allowing them to gradually clear their state tax debt. Once the liability is paid off, the lien can be removed.
- Watch for Legal or Financial Restrictions: A tax lien can make it difficult to sell property. If you’re denied credit or refinancing, you need to check to see if a lien is the cause.
What Should You Do If You Receive an IRS Tax Lien Notice?
Receiving an IRS tax lien notice is a serious matter that requires immediate attention. The first thing you want to do is review the notice carefully to confirm the accuracy of all information contained in the notice. Compare the information with your tax record, and if you find any discrepancy, carefully follow the instructions in the notice and meet all response deadlines to avoid further complications.
If the lien is valid and you owe back taxes, it’s time to take action toward removing the lien by paying your debt in full. It’s the fastest and best way to get a release from the IRS. If you’re unable to fully pay your tax bill, perhaps due to financial hardship, the IRS provides other tax relief options, such as an installment agreement, penalty abatement, or Offer in Compromise, that may be available to you.
Always consult a tax professional when dealing with IRS issues, especially if you’re facing a tax lien. A tax professional can help you determine the best course of action based on your financial situation. If such needs arise, a tax attorney knows how to effectively negotiate with the IRS on your behalf. Not sure which tax professional to call? Our tax attorney vs. CPA blog post clearly outlines the role of each professional and how they can help your tax situation. Get a free consultation today if you think you need to speak with someone.
How to Remove an IRS Tax Lien
A lien isn’t a death sentence. There are a number of ways to remove an IRS tax lien:
1. Paying the Tax Debt in Full
The most effective way to get rid of a federal tax lien is to pay your tax debt in full. Once the IRS receives your full payment, they’ll release the lien within 30 days. The IRS will further update the public that the lien has been lifted.
2. Setting Up a Payment Plan
If you’re unable to pay your tax debt in full amount, you could request an IRS installment agreement. Setting up payment plans allows taxpayers to pay their back taxes over time in manageable monthly payments, thereby lessening the stress on their finances. However, interest and penalties still accrue on the unpaid balance.
3. Offer in Compromise
An offer in compromise (OIC) is another popular tax relief option for taxpayers struggling to pay their IRS debt in full. An OIC lets you pay less than you owe, although you’ll have to meet certain stringent criteria to qualify for this program. The IRS can also deny your offer if it doesn’t find your claim convincing enough; hence, it’s advisable to work with a tax lawyer if you’re considering using this option.
4. Discharge of Property
Taxpayers can also apply for a certificate of discharge. A discharge of property removes a lien from specific properties you own. In a case where you want to sell the property, a discharge of property makes it easier to find buyers. Otherwise, the IRS will have the upper hand, discouraging interested buyers.
5. Subordination
Consider applying for a certificate of subordination, which allows creditors to take priority over the IRS, making it easier for you to sell your assets. Subordination doesn’t apply to all assets, however. You must also meet certain eligibility requirements by the IRS when applying for subordination. Note that lien subordination does not remove your tax lien or your legal obligation to pay; it only allows other creditors to get priority treatment.
Need Legal Help with Your IRS Tax Lien?
As against popular belief, a tax lien doesn’t mean that the IRS has seized your properties to satisfy your debt; instead, it’s a claim against your assets. And the earlier you respond to the IRS’s notice, the better your chances of arriving at a safer outcome regarding settling your back taxes.
It’s always best to avoid an IRS tax lien altogether by paying your taxes on time so you don’t accumulate tax debt. However, if you’ve fallen behind on your tax filings due to incomplete financial records, we have the best tax lawyers to help you fix it quickly.
Our skilled and experienced team of tax attorneys has a deep understanding of tax liens. We know how to negotiate with the IRS to get our clients out of tax trouble with the best possible outcomes. Whether you want help with staying on the IRS good books or got punked and looking for a way out, we’re here to help. Schedule a free tax lien consultation here.
