Ultimate Guide to Tax Liens

Everything you need to know about tax liens

If you or your business are overwhelmed with tax debt, consider hiring a tax relief firm, such as Optima Tax Relief.

Benjamin Franklin is credited with this famous quote: “In this world, nothing can be said to be certain, except death and taxes.” Those of us who have been on the business end of a tax lien notice understand Franklin’s pain.

If you are unable to pay a tax debt, you are not alone. An estimated 17 percent of federal taxes go unpaid every year. For at least some of that outstanding debt, the government files tax liens. In addition to federal tax liens, tax liens can also be filed at the state and local level.

Receiving notice of a tax lien can be an unsettling and confusing affair. This guide is designed to help you understand what a tax lien is, how it affects your credit, and what steps must be taken to resolve the issue.

What Is a Tax lien?

In simple terms, a tax lien is a claim by the government against your assets based on your failure to pay a tax debt on time. As far as tax liens are concerned, your assets include both your personal and real property, as well as your financial assets.

Tax liens are used as a last resort to force delinquent taxpayers to pay up. Federal, state, and local governments can place tax liens for unpaid income or property taxes. When most people think of tax liens, they associate them with the Internal Revenue Service, but tax liens can also come from a failure to pay state or even local taxes.

What triggers a Federal Tax lien?

Three things typically happen before the Federal Government sends you notice of a federal tax lien. This is what the IRS has to say: “A federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in all your property, including real estate, personal property, and financial assets.” The IRS files a notice of federal tax lien after other steps fail to result in payment of an outstanding tax debt.

A federal tax lien exists after:

  1. The IRS assesses your liability (figures out what you owe).
  2. The IRS sends you a bill that explains how much you owe (Notice and Demand for Payment).
  3. You neglect or refuse to fully pay the debt in time.

Once these three things happen, the IRS may file a public document called a Notice of Federal Tax Lien to alert creditors that the government has an interest in your property because of taxes that you owe. This notice is automatically filed if your tax debt is over $10,000, but may also be filed for a lesser debt at the discretion of the IRS. This notice is typically filed in your county of residence or, in the case of a business, in the county in which you do business.

Is there a difference between a Tax Lien and Tax levy?

Think of a tax lien as step one in the government’s process to collect the money you owe. The tax lien constitutes a claim against your property.

Just as you cannot sell your home without paying off your mortgage, a lien prevents you from selling your assets without first paying off the IRS. Tax levies are a completely different collection method.

A tax levy, on the other hand, occurs when the government takes possession of the property to sell it and pay for back taxes. The IRS may seize and sell any type of real or personal property you own or have an interest in.

Can the government really take your property? The simple answer is “yes”. Check out our article “Understanding Tax Lien Mumbo Jumbo” where it says it best, stating:

“If you have valuable real or personal property – say, a home, a car or a boat – the government might impose a tax lien to collect the debt. That means if you are unable to pay the taxes owed, the government – state or federal – sells your real or personal property to satisfy the lien.”

The good news is that, if you have received a notice of tax lien, there are things you can do to avoid an actual tax levy. A tax lien, then, does not necessarily mean that you will lose your assets if you take the right steps to address it. Those steps will be discussed a little later in this guide.

How do Tax liens affect your credit?

A tax lien has a significant impact on your credit, both in the short-term and the long-term. While the government does not report a tax lien to the three major credit bureaus, the credit bureaus themselves search public records to find filed tax liens.

Once a tax lien shows up on your credit report, your credit scores can drop dramatically. A tax lien could drop your credit score by as much as 100 points according to a 2010 Congressional testimony by Nina Olson, who leads the Taxpayer Advocate Service, an independent organization within the IRS.”

Credit scoring models take a very dim view of tax liens, and they are considered to be one of the most detrimental items on your credit reports — tax liens have a similar effect as bankruptcy or judgments. This means that it can be much more difficult for you to be approved for credit, and may substantially increase the interest rate you have to pay if you are approved for a loan of any sort.

A tax lien has an adverse effect on your credit score, sometimes for years.

Sadly, your credit score does not recover quickly from that kind of hit. Under federal law, unpaid tax liens can remain on your credit report indefinitely. Unlike other public records, a tax lien can linger around on your credit reports, wreaking havoc on your credit scores for a long time.

Even a released lien does not disappear from your credit report quickly. SuperMoney’s “Why Didn’t My Credit Scores Go Up After I Paid My Tax Lien?” notes: “Even released liens are considered derogatory by pretty much every credit scoring system currently being used. For your scores to improve in any meaningful way you are likely going to have to get the lien removed, and that’s assuming it is the ONLY negative item on your credit reports.”

Are there other effects of a Tax Lien on your finances?

A tax lien on your credit report can also affect your chances of getting a job. Employers will often check the credit reports of candidates before hiring them or giving them an interview, particularly in industries that provide financial services.

Tax liens may also lead to wage garnishments. A wage garnishment is a type of tax levy wherein your employer is notified by the IRS to withhold a portion of your wages and forward it to the IRS to be applied to your outstanding tax debt. This can have a significant impact on your take home pay and your budget.

A tax lien attaches not only to your property at the time the notice of tax lien is filed but also to any property you may acquire for the duration of the tax lien. This includes business property you may own and rights to business assets like accounts receivable as well.

How can you remove a Tax Lien from your property?

Some people in hot water with the IRS believe that filing for bankruptcy may be a good way to handle a tax lien. However, it is important to note that a tax lien attaches to all your assets, including your future assets and business property. Even if you file for bankruptcy, your tax debt and lien may continue afterward.

Related: How to Survive an IRS Audit.

Filing for bankruptcy: Although bankruptcy can be a useful tax relief tool, it is certainly not a silver bullet when it comes to tax liens. Once the IRS attaches a federal tax lien to your property, it can remain even after a taxpayer files for bankruptcy. Bankruptcy also has an adverse effect on your credit score and therefore is not always the best option for dealing with tax obligations. Here are some other options to eliminate your tax problems:

Pay Your Debt in Full: The best way to remove a tax lien from your property is to pay your debt in full. If you cannot pay your debt in full, it is important to pay attention to any letters or correspondence you get from the IRS. The IRS will often work with you to set up an acceptable repayment plan if you are diligent about responding to their notices.

It is important to remember, however, that paying your debt in full removes the lien from your property, but does not necessarily remove the record of the lien from your credit report. See the section of this guide entitled “How Can You Remove a Tax Lien from Your Credit Report?” for more information.

Request a Discharge of Property: To remove a tax lien from a specific piece of property, you can apply for a discharge of property with the IRS. While a discharge does not eliminate your tax debt, it can free a specific property from being encumbered by that debt. This may be useful when trying to sell or refinance a property.

Request a Subordination: While a subordination will not eliminate your tax debt, it will allow a junior creditor to move ahead of the IRS for the property. This may help you get a loan for the property.

Request a Withdrawal: You can also request a withdrawal of a federal tax lien notice under special circumstances. This removes the public notice of your tax lien. However, you are still liable for the tax amount you owe.

How can you remove a Tax lien from your credit report?

When your taxes are paid in full, the government entity to whom those taxes were owed, either the federal government or your state government, should file a notice of release of your tax lien in the same jurisdiction in which your original notice of tax lien was filed.

However, while this releases your tax lien, it does not reverse the negative effects of your tax lien on your credit report. To get the lien removed from your credit report, you will likely need to take the extra step of having the lien withdrawn.

For federal tax liens to be withdrawn, you must meet the following criteria:

  1. Your tax liability must be satisfied, and your lien must be released.
  2. You must be in compliance with filing your individual and business tax returns and all information returns for at least three years.
  3. You must be current on your estimated tax payments and federal tax deposits (if applicable).

The process for withdrawing a state tax lien varies from state to state. If you need a state tax lien removed, you will need to contact your particular state and ask if there is a process in place for withdrawing tax liens that are paid in full, rather than just releasing them.

Once a tax lien is withdrawn, the credit bureaus will remove those liens from your credit report if the IRS or you contact them and ask them to do so.

How can you avoid Tax liens negotiating with the IRS?

The best way to avoid a tax lien is to file and pay your taxes on time, every time. If you fall on hard times and are unable to pay your tax obligation in full, often you can still avoid a tax lien by proactively setting up an installment agreement that meets IRS requirements. In general, the more you are able to pay down your tax debt, the more options you will have for repayment with the IRS.

What Should You Do When You Receive a Notice of Federal Tax Lien?

The first thing to remember when you receive a notice of federal tax lien is not to panic. Assistance is available from both the IRS and other agencies and companies that offer tax relief services.

Ways the IRS offers assistance fall under the Fresh Start Program and include:

  • Installment agreement – Wherein you agree to have payments automatically deducted from your bank account for up to 72 months.
  • Application for withdrawal – Based on payment in full.
  • Application for withdrawal – based on your enrollment in a direct debit installment agreement wherein your payments to the IRS will be automatically taken from your bank account at agreed upon intervals.
  • Offer in compromise – Whereby you and the IRS mutually agree to settle your tax debt for less than the full amount, based upon the IRS’s assessment as to your ability to pay the debt.

Check out SuperMoney’s comprehensive reviews of top tax relief companies.

Can a Tax Relief company help remove Tax liens?

Yes. In fact,  if you have a Tax lien notification from the IRS, it’s a good idea not to deal with it yourself but get professional Tax attorneys/ Tax relief companies on the case. They can help negotiate a Lien on your behalf with the IRS, and gradually get it removed.

But not all tax relief agencies are created equal. It is important to choose your tax relief company wisely since the right company can help you reduce or eliminate tax debt and save you time, stress and money. SuperMoney can help you find the right company with our comprehensive tax relief reviews, where you will get tips and advice on the services offered by tax relief companies, along with helpful user reviews. Check it out!

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