What Is a Tax Lien?

Tax lien definition

“A tax lien is a legal claim by a government on a taxpayer's assets when tax obligations remain unmet,” said Randall Brody, an enrolled agent and the founder of Tax Samaritan. “This serves as collateral, granting the government the authority to seize the taxpayer's property, be it real estate, personal belongings, or financial assets, to settle the outstanding tax debt.”

Tax lien consequences

A tax lien gives the IRS the right to collect the back taxes owed when you sell your asset, and the agency can eventually issue a tax levy, taking possession of your assets. This might include repossessing your home or vehicle, deducting money from your bank account, or garnishing your wages.

A lien can also potentially disrupt the sale of your assets, as the new owner would have to settle the lien to own your home or vehicle (or other asset) outright. In addition, some investors may buy tax liens and pay off the amount owed. They are able to collect principal and interest owed from the lien themselves.

And finally, even though they don’t show up on your credit report, tax liens can negatively impact your access to credit.

“Tax liens can appear in public records, which potentially impacts the taxpayer's ability to qualify for new credit,” said Brody. “If a lender discovers an unpaid lien in a public record, it could affect their eligibility for loans or credit cards. Additionally, tax liens can lead to legal actions such as wage garnishment, bank levies, or seizure of property.”

» MORE: How to file back taxes

Differences between a tax lien and a tax levy

A tax lien is a legal claim to property or assets by the government. Tax liens give the IRS the right to collect, but taxpayers can take action to prevent the IRS from taking possession of their assets. (We explore how to deal with a tax lien below.)

A tax levy, on the other hand, is the process of repossessing the property or assets from taxpayers. A tax levy is imminent, allowing the IRS to seize and sell real and personal property to settle your tax debts.

How the tax lien process works

Please note that we’re specifically talking about how the tax lien process works at the federal level. You can also have a tax lien for unpaid taxes at the state and local levels, but the specifics of their processes may vary. Here’s what you can expect from the federal tax lien process.

1. The tax lien process starts with a letter from the IRS detailing taxes owed, known as a Notice and Demand for Payment. Once the tax bill becomes overdue, the IRS files a Notice of Federal Tax Lien that lets creditors know the government has a legal right to your property.
2. This tax lien is attached to all your assets and any future ones you may acquire until it’s removed. The lien also attaches to any business property or accounts receivable.
3. The timeline to respond to a Notice of Federal Tax Lien is typically 30 days from the date of the letter. If you don’t respond to letters from the IRS about your back owed taxes or the tax lien, the IRS may move forward with a tax levy, allowing them to repossess your property or assets.

How to deal with a tax lien

If you receive a Letter of Federal Tax Lien from the IRS, you have several options for dealing with it, depending on your situation.

Payment and removal

To remove a tax lien, you can simply pay the back taxes owed, including fees and penalties. After receiving your payment, the IRS will remove the lien within 30 days.

Payment plans

The IRS offers payment plans if you can’t pay the total amount owed. You’ll pay additional fees until you pay off the debt, but if you create a payment plan with the IRS, it may stop collection processes. That may prevent a tax levy.

Offer in compromise

“In certain circumstances, taxpayers may qualify for an offer in compromise (OIC), where they can settle their tax debt for less than the full amount owed,” Brody said. “This option is available to taxpayers who demonstrate financial hardship or exceptional circumstances.”

You can submit an OIC application, along with a nonrefundable application fee and a partial payment of your tax debt, via the IRS website. But just because you technically qualify and you apply, doesn’t mean the IRS must accept your offer.

Dispute and appeal

If you don’t have the funds to pay back owed taxes or disagree with the assessment, you can file IRS Form 12153 to request a hearing. This hearing allows you to dispute the tax lien (or levy) to prevent further IRS collections.

Discharge of property

In some cases, taxpayers can discharge a property, removing it from the tax lien. Eligible properties and situations are in IRS Publication 783.

Bankruptcy

While filing for bankruptcy doesn’t automatically remove an IRS lien from your property or assets, it can stop IRS levies.

» MORE: Pros and cons of IRS payment plans

Bottom line

Tax liens give the government legal claim to your property, which can become a massive headache if you don’t take steps to deal with them right away. Luckily, there are a few ways to take care of them, including paying the back-owed taxes, getting on a payment plan, disputing the claim, or even filing for bankruptcy.

It’s a good idea to obtain legal counsel when dealing with tax liens to ensure the IRS doesn’t take possession of your assets.