What is a tax lien?
If you’re behind on tax debts, the IRS could claim your property
Paying your taxes is important, and the IRS has more power than most collection agencies to take action against you if they’re unpaid.
One of the ways the IRS can penalize you for unpaid taxes is a tax lien.
Tax liens give the IRS legal claim to your personal and business assets, which can prevent you from accessing further credit. If you don’t settle your tax debt, the IRS can even take possession of your property.
There are several ways to deal with tax liens to avoid the IRS knocking at your door. We’ll review how tax liens work, how to manage them, and steps you can take to avoid losing your assets to the IRS.
Key insights
- Tax liens are legal claims by the IRS to your personal or business property and assets due to back owed taxes.
- Tax liens are attached to all personal and business assets until removed.
- If you don’t pay your back owed taxes, the IRS can levy your property or assets, allowing them to repossess them.
- The IRS can even take possession of your bank accounts or garnish your wages to collect on back owed tax debts.
- There are several ways to remove tax liens, including paying back owed taxes, setting up a payment plan, or discharging certain property.
What a tax lien means
“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.”
A tax lien also 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.
“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
How the tax lien process works
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.
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.
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.
The timeline to respond to a Notice of Federal Tax Lien is typically 30 days from the date of the letter.
How to deal with a tax lien
If you have received a Letter of Federal Tax Lien from the IRS, there are several ways to deal with it:
Pay taxes owed: To remove a tax lien, you can simply pay the back taxes owed (including fees and penalties). After payment is received, the IRS will remove the lien within 30 days.
Get on a payment plan: The IRS offers payment plans if you can’t pay the total amount owed. While you’ll still pay additional fees until you pay off the debt, if you create a payment plan with the IRS, they may stop collection processes. That may prevent a tax levy.
Submit 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,” said Brody. “This option is available to taxpayers who demonstrate financial hardship or exceptional circumstances.”
Dispute the claim: 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, a taxpayer will be able to discharge a property, removing it from the tax lien. Eligible properties and situations are in IRS Publication 783.
Bankruptcy: Filing for bankruptcy doesn’t automatically remove an IRS lien from your property or assets. But in some cases, bankruptcy can remove IRS liens.
FAQ
Is a tax lien the same as a tax levy?
No, a tax lien is a legal claim to property or assets by the government, while a tax levy is the process of repossession of the property or assets from taxpayers. Tax liens give the IRS the right to collect, but taxpayers can take action to prevent the IRS from taking possession of their assets. A tax levy is imminent, allowing the IRS to seize and sell real and personal property to settle your tax debts.
Can a tax lien affect your credit score?
Tax liens are no longer a part of your credit report and typically don’t affect your credit score. However, tax liens can prevent you from obtaining additional credit until the IRS removes them.
Does a tax lien expire?
There is a 10-year statute of limitation on tax liens, meaning the IRS has 10 years from filing the initial tax lien to collect on the tax debt owed. There are exceptions to this rule, though, and collections may persist beyond the 10-year statute according to IRC 6502(a).
What is tax lien investing?
Tax lien investing refers to the process of purchasing tax liens from states or local municipalities and collecting principal and interest payments owed by a taxpayer. There are companies that assist with the process for a fee.
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 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.
Article sources
- IRS, “Understanding a Federal Tax Lien.” Accessed Feb. 1, 2024.
- IRS, “Publication 594 (Rev. 07-2018).” Accessed Feb. 1, 2024.
- IRS, “Additional Information on Payment Plans.” Accessed Feb. 1, 2024.
- IRS, “Offer in Compromise.” Accessed Feb. 1, 2024.
- IRS, “Form 12153 (Rev. 7-2022).” Accessed Feb. 1, 2024.
- IRS, “Publication 783 (Rev. 12-2022).” Accessed Feb. 1, 2024.
- Gov Info, “Title 26 - Internal Revenue Code.” Accessed Feb. 1, 2024.
