What Is A Tax Lien? Definition & FAQs

If you fail to pay all of your federal or state income tax, tax authorities could put a lien on your property, including your home. This is no laughing matter. A lien doesn’t mean you’ve lost your property – yet. But it’s just one step removed from a levy, which means the government seizes your property to cover your debts.

So, what is a tax lien?. Here’s everything you need to know about tax liens and what they mean for your home or business.

What Is A Tax Lien?

A tax lien is a claim the government places on property, including real estate, when the owner has not paid all of their taxes. In the case of the federal government, this is typically due to unpaid income tax. However, state and local governments may also place a tax lien on a property due to unpaid property tax.

A tax lien doesn’t just apply to real estate. It applies to all assets owned by a particular taxpayer. This includes vehicles, valuables such as jewelry, stocks, bonds, and even cryptocurrency. Not only that, but if the taxpayer obtains more property, the lien will also apply to that property. If the taxpayer in question is a business, the lien will apply not just to business property, but also to accounts receivable.

The IRS has several payment options for people and businesses to avoid a lien. As long as you show that you’re making a genuine effort to pay off the debt, the IRS, as well as most state and local governments, will typically be willing to work with you. You may even be able to obtain forgiveness for part of the tax debt.

A lien in and of itself doesn’t mean that your property will be taken from you. What it means is that in the event of a bankruptcy, the IRS or state equivalent will have a primary claim to any assets. Keep in mind that, unlike most debts, a bankruptcy will not eliminate tax debt. Even after you go through bankruptcy, you or your business will still be liable for any remaining debt.

If you don’t negotiate a payment plan or a settlement, the next step is a tax levy. In this case, the government will seize your assets and auction them off to cover your debt. They will also garnish your wages or bank account.

Example Of A Tax Lien

Bill failed to pay his property tax last year, and the county placed a tax lien on his used car lot. He applies for a loan to expand his service center, and finds out about the lien when the bank refuses to offer a line of credit. He pays off the debt, and after 30 days, the county removes the lien. He now qualifies for the loan, although he pays a higher interest rate due to his damaged business credit.

When Can The IRS Place A Tax Lien?

The IRS can place a tax lien on a taxpayer if the taxpayer owes tax debt and has made no effort to pay. This is a federal lien, so the IRS takes priority over any other creditors. As a result, it makes it virtually impossible to access credit; any creditor would immediately take a back seat to the federal government. You also won’t be able to sell any property that’s covered by the lien.

A federal tax lien will remain in place until the taxpayer has paid the tax in full, agreed to a payment plan, or settled for a different amount. If none of these things happen, the IRS can then proceed to seize the property.

What Does It Mean If You Have A Tax Lien?

If you’re under a tax lien, you may experience the following consequences:

  • You won’t be able to access new lines of credit.

  • You won’t be able to sell or refinance your property.

  • You’ll spend hours on hold with the IRS call system.

  • An IRS agent may be assigned to your case.

  • The government may seize your property.


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tax lien

How To Remove A Tax Lien

To remove a tax lien, you’ll have to convince the IRS to remove it. The easiest way to do this is simply to pay off your tax debt. That said, this isn’t always possible, and in that case, you’ll have to negotiate.

If you can demonstrate to the IRS that you don’t have enough cash on hand to pay the debt, they will generally agree to a payment plan. If it’s obvious that you’ll never be able to pay the debt, the IRS may even agree to settle for a lesser amount.

In some cases, you may be able to subordinate the IRS on some property. This doesn’t remove the lien, but it allows another lender to take precedence for a particular property. The IRS will usually agree to this if you can refinance at a lower rate – improving your cash flow and ability to pay.

In other cases, you can have an individual property removed from the lien. This is subject to strict limitations, since the IRS can no longer seize a discharged property. You may also be able to have the lien withdrawn. This does not remove your tax debt, but you can go through bankruptcy without the government having first dibs on your assets.

Tax Lien Frequently Asked Questions

Before we wrap up, here are a few of the most frequently asked tax lien questions.

What Is A Tax Sale?

A tax sale is what happens if a lien is placed on your property and you don’t settle the debt. In this case, IRS will file a levy. You’ll first be served notice, and you’ll have the opportunity to ask for a hearing. If you don’t do this – or pay off the debt – the IRS will seize your cash assets, and sell off your non-cash assets to pay off the debt.

If your total assets are worth more than the debt, everything will still be sold off. You’ll receive a check for any sale proceeds that exceed the cost of your debt.

Will A Tax Lien Affect My Credit Score?

No. Tax liens used to appear on your credit report, but in 2017, the three major credit bureaus jointly agreed to stop listing them. The last tax liens fell off of credit reporting systems in April of 2018. Then again, liens occasionally appear on credit reports due to error. If that happens, contact the relevant credit bureau to fix the problem.

How Long Does A Tax Lien Last?

The statute of limitations on an IRS tax lien is ten years. If you haven’t settled by then, the IRS forfeits the right to seize your property. Keep in mind that there are some conditions where the IRS can obtain an extension. To do so, they must file the lien again within 30 days of its expiration.

Once you’ve paid off your lien, the IRS is legally required to remove it within 30 days. If they don’t, it’s probably an error. Call the IRS, and they can remove the lien for you.

Can You Purchase Property With A Tax Lien?

Yes and no. There’s no law that prevents you from buying a house. However, while liens no longer appear on credit reports, they are a matter of public record. The bank can and will find out about your lien during the loan approval process. If you haven’t started a repayment plan with the IRS, the bank won’t qualify you for a mortgage.

Summary

A tax lien is a government judgement placed on your property due to unpaid personal or business taxes. Under a lien, you can’t dispose of your property, and you won’t be able to open a new line of credit. If there’s a lien on your property, it’s important to immediately call the IRS or other tax agency and work out a payment plan. Otherwise, the lien could proceed to a tax levy – and nobody wants that.


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Sources

https://www.irs.gov/businesses/small-businesses-self-employed/understanding-a-federal-tax-lien