What Is a Tax Lien?
A tax lien is a legal claim against the assets of an individual or business that fails to pay taxes owed to the government. In general, a lien serves to guarantee payment of a debt such as a loan, or in this case, taxes. If the obligation is not satisfied, the creditor may proceed to seize the assets.
Key Takeaways
- If a taxpayer does not respond to a demand for payment, the government may place a lien on the person's assets.
- The lien may be removed if the taxpayer agrees to a payment plan or takes other action with the agreement of the government.
- If no attempt to repay is made, the government may seize the assets for sale.
Understanding a Tax Lien
The federal or state government can place a tax lien on a property if the owner is in arrears on income taxes. Local governments may place a lien on a property for nonpayment of property or local income taxes.
The lien does not mean that the property will be sold. Rather, it ensures that the tax authority gets the first claim over any other creditors vying for the creditor's assets.
The Process of a Tax Lien
The process begins when a taxpayer gets a letter that details how much is owed. This is known as a notice and demand for payment.
If the taxpayer fails to pay the debt or attempt to resolve it with the Internal Revenue Service (IRS), the agency can place a lien on the person's assets.
This lien attaches to all of a taxpayer’s assets, including securities, property, and vehicles. Any assets the taxpayer acquires while the lien is in effect also apply. It also attaches to any business property and the accounts receivable for the business.
If the taxpayer chooses to file forbankruptcy, the lien and the tax debt couldcontinue even after the bankruptcy. Most debts are wiped out by bankruptcy proceedings, but not federal tax debt.
What the IRS Can Do
In the U.S., the IRS may place a lien against a taxpayer's home, vehicle, and bank accounts if federal tax payments are delinquent and there has been no demonstrated effort to pay the taxes owed.
A federal tax lienhas precedence over all other creditors' claims. It also makes it difficult for the taxpayer to sell the assets or to obtain credit.
The only way to release a federal tax lien is to fully pay the tax owed or reach a settlement with the IRS.
Once a lien has been filed, it used to show up on the taxpayer's credit report, damaging the person's credit score. This could also prevent the taxpayer from selling or refinancing any assets to which liens have been attached. Note that since 2018, the three major credit reporting agencies have stopped including tax liens on credit reports.
If 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 is owed. While a lien secures the government’s interest or claim in the property, a levy permits the government to seize and sell the property in order to pay the tax debt.
The lien will remain in place until the tax bill is resolved or the statute of limitations on the debt expires.
Getting out of a Tax Lien
The simplest way to get out of a federal tax lien is to pay the taxes owed. Tax liens are publicly recorded. After a tax debtor pays off the debt, the county records will be updated to reflect the fact that the lien has been released.
However, if this is not possible, there are other ways to deal with a lien with the cooperation of the IRS.
- The IRS will consider releasing a tax lien if the taxpayer agrees to a payment plan with an automatic withdrawal monthly until the debt is satisfied.
- The taxpayer maybe able to dischargea specific property, effectively removing it from the lien. Not all taxpayers or properties are eligible for discharge. IRS Publication 783 details regulations about discharging property.
- Subordinationdoes not actually remove the lien from any property but it sometimes makes it easier for the taxpayer to obtain another mortgage or loan. IRS Form 14134 is used to apply for such action.
- Yet another process, withdrawal of notice, removes the public notice of a federal tax lien. The taxpayer is still liable for the debt, but under withdrawal, the IRS does not compete with any other creditors for the debtor’s property. Form 12277 is the application for it.
If repaying the taxes is simply impossible, the taxpayer must pay as much of the debt as possible and seek dismissal of the balance in bankruptcy court.
Can Tax Liens Be Purchased?
In many localities and states, public tax debt can be sold through auctions known as "tax lien sales." At auctions, third parties can bid on liens and buy them from munipalities and states. After such a transfer occurs, the property owner will owe unpaid taxes and interest to the third-party purchaser of their lien going forward. A good understanding of tax lien investing and the local real estate market is important.
How Long Can Property Taxes Go Unpaid?
The length of time that one can be delinquent on their property taxes varies from state to state. In general, property owners have around two years before their homes are foreclosed on.
Where Do I Find Liens?
How an individual can determine whether they have a tax lien against their property depends on where they live and which agency imposed that lien. In most places, a search via the state record office or the attorney general's office will reveal the existence of a lien against property. The Automated Lien System of the IRS can locate liens against businesses. There are private, third-party lien searching services that can also do lien research.
The Bottom Line
A tax lien is a claim against the assets of an individual or business who fails to pay their tax debt to the government. This is related to but different from a tax levy, which is the act of taking the property if the subject of a lien neglects to make arrangements to settle their debt. Individuals affected by tax liens can resolve them by paying off their tax debt, or coming to a negotiated settlement with the agency pursuing it, such as the IRS.
