There are several ways for you to pay your federal income taxes. Similarly, if you don't pay your taxes, the IRS has several ways to pursue recourse. The IRS can get money out of Americans who owe delinquent taxes by levying their property or by using tax liens.

You will likely owe penalties and interest to the IRS on your owed balance, but the service can enforce collection with a tax lien or levy as well. Let's explore tax levies, how they work, and how to avoid them.

What is a tax lien?

Tax liens are legal claims placed by the government on real estate or other assets when the owner is behind on their taxes.

The purpose of a lien is to guarantee the payment of a debt, such as a loan, or in this case, taxes. When the debt is not paid, the creditor may go after the assets.

You do not have to sell your property to satisfy a tax lien. However, when you sell, the IRS gets a cut of the proceeds as payment for the taxes owed.

Tax liens can affect all of the assets you own, such as your home and real estate, your vehicle and other personal property, as well as financial assets and any business properties that you may own. The IRS lien can also attach to assets acquired after the lien is issued but before it is settled.

Tax liens can be sold to investors for the money and the right to collect the money and interest from property owners.

You may face a tax levy if you do not resolve your federal tax lien. A tax levy is a way of obtaining revenue by seizing property. Tax levy actions can include garnishing your wages or seizing your assets.

What can the IRS put a lien on?

All property and property rights possessed by a taxpayer are subject to federal tax liens. Both tangible and intangible property are within the IRS' scope. 

The IRS can place liens on any property that you own. Assets, vehicles, personal items, and more are all eligible. Liens can also be attached to businesses. An IRS lien can affect even an incoming payment through accounts payable.

Throughout the entire duration of the lien, a lien attaches automatically to all properties acquired by the taxpayer. Therefore, any property you acquire after the IRS has placed a lien on your account will be subject to that lien. 

Furthermore, even the property that you've owned for decades may also be encumbered by the lien. 

IRS liens apply to both current and future property. Even if you purchase property after the IRS places the lien, the new property will still be covered by the lien. In order to get rid of a lien on all of your property, you need to pay your IRS debt in full.

How a Tax Lien Affects Your and Your Property

Tax liens are filed by the IRS with local government authorities, such as the secretary of state or county recorder in the county where you live, conduct business, or own property. There is no specific property the lien applies to - it applies to all real estate and personal property as well as any future assets you may acquire.

In addition, because it attaches to all your assets, you may have trouble selling or refinancing your property and managing your business. 

Assets During the term of the lien, the lien attaches to all assets owned by you (such as property, securities, vehicles) and future assets acquired.
Business All business property and all rights to business property are covered by the lien, including accounts receivable.
Bankruptcy If you file for bankruptcy, your tax debt, lien, and Notice of Federal Tax Lien may persist.

Does a lien affect your credit?

Tax liens have some good news. In the past, credit-reporting agencies included tax liens on credit reports, which negatively impacted credit scores. However, in 2017, the three major consumer credit bureaus, Equifax, Experian, and TransUnion, changed some of the rules on which public records are included in credit reports.

The National Consumer Assistance Plan, put forth by the three credit bureaus, eliminated the inclusion on credit reports of consumer debts that were not the result of a contract or a commitment to pay. Traffic tickets, fines, and tax liens no longer appear on credit reports.

How long before the IRS can issue a tax lien?

The IRS may demand payment in writing if you do not pay a valid tax bill. It is called a CP-501 notice, referring to the IRS number in the right-hand corner.

 A notice of your tax debt will be filed in the public records if you fail to pay within 30 days. The document is called a Notice of Federal Tax Lien.

info icon Helpful Resouce: IRS Letters and Their Meanings

How does a tax lien work?

When a taxpayer receives a letter stating how much they owe to the IRS for their tax liability, the process begins. This is called a notice and demand for payment.

A lien can be placed on a taxpayer's assets if the taxpayer does not pay the debt or attempt to resolve it with the IRS.

Tax liens attach to all assets of the taxpayer, including securities, real estate, and vehicles. Any assets acquired by the taxpayer during the term of the lien are also subject to the lien. Additionally, it attaches to any business property and accounts receivable.

In the event a taxpayer files for bankruptcy, the lien and tax debt may continue even after the bankruptcy. Bankruptcy usually erases most debts, but not federal tax debt.

Is a tax lien a crime?

The good news is that a tax lien is very rarely a criminal offense.

To transform a civil federal tax matter into a criminal one, the IRS must refer the case to its Criminal Investigations division. The IRS may take such action if they believe the business owner has intentionally evaded taxes.

An individual or business can only be prosecuted if the IRS proves that the failure to pay was a deliberate violation of the tax code.

Fraudulent activity includes hiding income, filing false tax returns, falsifying deductions, creating fake invoices to claim bogus deductions, or running a cash business without reporting receipts.

Tax liens can only be considered a crime if the IRS can prove that you knowingly tried to defraud them.

How to Get Rid of a Lien

Paying the taxes owed is the simplest way to eliminate a federal tax lien. There are, however, other options if this is not possible, including working with the IRS to resolve the lien.

Payment Plans

Tax liens can be released by the IRS if the taxpayer agrees to a payment plan that includes a monthly withdrawal.

Release of Property

There may be options for releasing a specific property from the lien, effectively removing it from the tax assessment. Discharges are not available for every taxpayer or property. For details, see IRS Publication 783.

Subordination

While subordination does not remove liens from real property, it can sometimes make it easier for taxpayers to obtain other loans or mortgages. You can apply for subordination using IRS Form 14134.

Example of IRS form 14134

Withdrawal of Notice

A public notice of a federal tax lien may also be removed through the withdrawal of notice process. Under withdrawal, the IRS does not compete with any other creditors for the debtor's property, but the taxpayer is still liable for the debt. An application for withdrawal is done through IRS Form 12277.

Example of IRS form 12277

Bankruptcy

Taxpayers who are unable to repay their taxes should pay as much of the debt as they can and seek to have the balance of the debt discharged by bankruptcy.

In some cases, taxpayers facing financial difficulty may not be able to pay their tax bill in full. In this case, it is recommended that taxpayers facing a tax lien or levy immediately contact a licensed tax-relief professional to determine what options are available.

What happens if you do not pay your tax bill once you have a lien?

In the event that the taxes remain unpaid, the tax authority can use a tax levy to legally seize the taxpayer's assets in order to collect the money it owes.

Unlike a lien, a levy allows the government to seize and sell property to pay the tax debt.

info icon Helpful Resource: What is a tax levy?

Liens against property are publicly recorded. The county records are updated to reflect the fact that a tax debtor has paid off the debt.

How long does a tax lien last?

IRS tax liens last for 10 years, or until the statute of limitations on your tax debt expires.

In addition to repaying the debt or entering into a payment plan, there are other ways to remove the lien.

The IRS may have issued a Notice and Demand for Payment to you after you failed to pay your tax debt, and now a federal tax lien has been placed against your property. IRS tax liens last for at least ten years. According to Section 6502 of the Internal Revenue Code (IRC), IRS tax liens may last longer than 10 years if:

  • An installment agreement is signed for the payment of tax debt, the statute of limitations will be extended
  • In exchange for the release of a federal tax levy, the taxpayer agrees to extend the statute of limitations for enforcing the federal tax lien
  • IRS files a new lien within the refiling deadline

A suspension of the collection period can also be granted under Section 6503 of the IRC if the following events occur:

  • A notice of deficiency
  • seizure of assets by a court
  • The taxpayer resides outside the United States for a period of six months or more
  • The taxpayer's property has been seized wrongfuly
  • The wrongful placement of a lien on the taxpayer’s property
  • The taxpayer filing for bankruptcy

How to Avoid a Lien

By filing and paying your taxes on time and in full, you can avoid a federal tax lien. In case you can't file or pay on time, don't ignore any correspondence you receive from the IRS. There are payment options available to help you settle your tax debt over time if you cannot pay the full amount you owe.

A lien could also be avoided if you were to apply a bankruptcy exemption to some or all of the equity in the asset, and triggering the lien would prevent you from getting the benefit of the exemption. It means you will lose some of the equity that would otherwise be exempt because of the lien.

There are two types of lien avoidance: total and partial.

A total lien avoidance is extremely helpful to a debtor because it completely eliminates a lien and gives the debtor ownership of the asset in its entirety.

In partial lien avoidance, the lien amount is reduced to the extent required by the exemption.

To avoid foreclosure or repossession, you will still need to pay off the rest of the lien, probably in a lump sum. In general, a debtor should try to avoid lien attachment whenever possible, even if they do not plan to keep the asset attached. Therefore, they can sell the asset and receive funds that can be used for other purposes.

Getting Help With a Tax Lien

Tax debt shouldn't be ignored if you cannot pay it in full. Respond to IRS letters as soon as possible. You may be able to avoid a federal tax lien or levy if you work out a payment plan, although you may still have to pay interest and penalties.

Tax professionals can help you deal with a tax lien or levy if one has been filed in error or help you craft an effective action plan to resolve your tax issues and move on with your life.

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