Ultimate Guide to Tax Liens

Everything you need to know about tax liens

If you are struggling to pay off your tax debt, you are not alone. An estimated 17% of federal taxes go unpaid every year. To secure the money they’re owed, the government files tax liens.

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

What is a tax lien?

A tax lien is a claim by the state or federal government against your assets, following your failure to pay a tax debt on time. Those assets include your possessions, your property, and your financial assets.

The government uses tax liens 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. Most tax liens come from the Internal Revenue Service (IRS), but tax liens can also come from a failure to pay state or even local taxes.

What triggers a federal tax lien?

The IRS files a notice of federal tax lien after other steps fail to result in payment of an outstanding tax debt. Three things must occur before the federal government files a tax lien notice:

  1. The IRS determines how much you owe.
  2. The IRS sends you a bill explaining how much you owe — this is called a Notice and Demand for Payment.
  3. You neglect or refuse to pay the debt in time.

After these three things happen, the IRS may file a public document called a Notice of Federal Tax Lien. This document alerts creditors that the government has an interest in your property because of taxes that you owe. A notice of tax lien 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?

Tax liens and tax levies are two different steps in the same process.

A tax lien is the legal claim against your property. This property may include real estate, personal property, and financial assets. When you have a tax lien against your property, you cannot sell it without first paying the IRS whatever monies you owe.

tax levy is the actual seizure of the asset to pay off a tax debt. If you don’t pay your taxes or arrange to settle your debt, the IRS may seize and sell any of your real or personal property. This includes both property and your current and/or future income.

The good news is that, if the IRS sent you a notice of tax lien, you can still prevent a tax levy. The government does not actually want to take your property — they would much rather receive their money. In 2016, the government filed 470,602 notices of tax liens, but only performed 436 actual levies (Source: IRS).

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 directly report tax lien to 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. According Nina Olson, head of the Taxpayer Advocate Service, a tax lien could lower your credit score by as much as 100 points. That’s as negatively impactful as bankruptcy.

This much damage to your credit score will make it much harder for you to be approved for credit. It may also greatly increase the interest rates of any loans that you qualify for.

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

And unfortunately, tax liens will hurt your credit for a long time. Under federal law, unpaid tax liens can remain on your credit report indefinitely. And paying off your debts won’t solve the problem. Even a released lien can linger on your credit report for as long as seven years.

So how can you combat this damage to your credit? By getting your notice of tax lien removed from your credit report entirely. Click here to read more about how to request the removal of a tax lien notice.

How else will a tax lien affect your finances?

A tax lien on your credit report can also affect your chances of getting a job. Employers 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 the IRS tells your employer to withhold a portion of your wages. Your employer then forwards these withheld wages to the IRS, to apply 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 was filed, but also to any property you acquire for the duration of the tax lien. This includes business property you may own, as well as rights to business assets like accounts receivable.

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 the best way to handle a tax lien. However, there’s a flaw in this logic. A tax lien attaches to all your assets — including your future assets and business property. That means that even if you file for bankruptcy, your tax debt and lien may continue afterward. In addition, bankruptcy negatively affects your credit score. As such, it is not a great option for dealing with a tax lien.

Here are some other ways to address 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, be sure to pay attention to any letters or correspondence you get from the IRS. The IRS may be willing to set up a more affordable repayment plan if you are diligent about responding to their notices.

But remember, while paying your debt in full removes the lien from your property, it won’t 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. Although a discharge won’t 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 will file a notice of release of your tax lien.

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’ll need to request that the IRS withdraw it.

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

  1. You’ve satisfied your tax liability, and the government has already released your lien.
  2. You’re in compliance with filing your individual and business tax returns and all information returns for at least three years.
  3. You’re 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, contact your state and ask if there is a process in place for withdrawing tax liens that are paid in full.

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

How can you avoid tax liens?

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, you may still avoid a tax lien by proactively setting up an installment agreement with the IRS. 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 if you receive a notice of federal tax lien?

Don’t panic. Assistance is available from both the IRS and other agencies and companies that offer tax relief services. The Fresh Start Program is an IRS-run series of programs to help taxpayers to get out of debt.

The Fresh Start Program’s tax relief opportunities include:

  • Installment agreements allow taxpayers to pay back their tax debt in monthly payments. In this option, the IRS will automatically deduct payments from your bank account for up to 72 months.
  • Applications for tax lien withdrawal let you request that the government remove your lien. You can qualify for withdrawal if you’ve paid your debt in full, or if you enrolled in a viable direct deposit installment agreement.
  • Offers in compromise let you to settle your tax debt for less than the full amount. Not everyone will qualify for this option — the IRS must confirm your inability to pay the debt in full.

Can a tax relief company help remove a tax lien?

Yes. Tax relief companies can call on their expertise to negotiate with the IRS on your behalf. They can also help to keep you from sharing any sensitive information with the IRS that might hurt your chances.

But not all tax relief agencies are created equal. The right company can help you reduce or eliminate tax debt, and can save you time, stress, and money. But there are scammers out there looking to take advantage of financially vulnerable taxpayers. It’s important to do your research and make sure that your chosen tax relief company is reliable, legitimate, and well reviewed. The best tax relief companies have tax lawyers and enrolled agents on staff, provide a money-back guarantee and charge competitive rates. Check out which tax relief company is the best fit for you.

Need help getting started ? SuperMoney can help you find the right company with side-by-side reviews and ratings of top tax relief companies.