What Is a Tax Lien? How It Works, How to Stop One
Tax liens put your assets at risk. To remove them you’ll need to work with the IRS to pay your back taxes.
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Head of Content, New Verticals Tax liens are serious business if you owe back taxes. Here’s how they can affect you, as well as some tips for what to do to remove a tax lien.
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What is a tax lien?
A tax lien is a legal claim a government places on real estate or other assets when the owner is past due on taxes. The IRS can place a lien on a person's current home, car, and bank account, as well as any future property they acquire. Municipalities may sell tax liens to investors who pay the tax bill in return for the right to collect the money and interest from property owners.
If you don’t take care of a federal tax lien, a tax levy — an actual seizure of property to pay taxes owed — could come next. Tax levies can include things such as garnishing your wages or seizing assets and bank accounts.
What does it mean if you have a tax lien?
If you owe back taxes and the IRS places a federal tax lien, here’s what could happen next.
- Your creditworthiness could take a nosedive. Tax liens may not appear on credit reports anymore, but the IRS can still file a public notice of the tax lien, telling creditors the government has a right to your property. That could jeopardize your ability to get a loan, says David Klasing, a CPA and tax attorney in Irvine, California.
- It can jeopardize a home sale or refinancing. Tax liens often surface during title searches. If you have equity in a house you’re trying to sell or refinance, you’ll likely have to use some of it to pay your taxes in order to close.
- It can cost you a lot of time. The IRS funnels many overdue taxpayers into its automated collection system, or ACS, which can mean spending hours on hold with the call center, Klasing warns. Some taxpayers might be assigned to a revenue officer, which could mean in-person visits, he adds.
- You can end up with a tax levy. If you don’t pay your back taxes after the IRS files a federal tax lien, the IRS may then issue a Notice of Intent to Levy.
Best Overall Tax Software
AD
- Federal: $79 to $139. Free version available for Simple Form 1040 returns only.
- State: $0 to $69 per state.
- Expert help or full service filing is available with an upgrade to Live packages for a fee.
Disclosures: TurboTax Free Edition is for Simple Form 1040 returns only (no schedules except for Earned Income Tax Credit, Child Tax Credit and Student Loan Interest). Roughly 37% of taxpayers qualify.
How to get a tax lien removed
The easiest way to get a tax lien removed is to pay the outstanding tax bill in full. Once your payment is processed, the IRS will remove the tax lien within 30 days.
Get on an IRS payment plan
Your tax balance will still accrue interest and penalties until it’s paid off, but if you allow the IRS to take at least three consecutive payments right out of your bank account (called a direct debit installment agreement), you might be able to get the IRS to withdraw the federal tax lien from public record.
Ask for an offer in compromise
An OIC, or offer in compromise, is an offer to settle your back taxes for less than the full amount you owe. There are lots of rules, and the IRS typically accepts fewer than half of the applications it gets in a year.
File an appeal
You can ask for a collection due process hearing from the IRS Office of Appeals if you want a review of a lien or levy notice. Also, if you disagree with an IRS employee’s decision about a lien or levy, you can ask for a conference with the employee’s manager and ask the Office of Appeals to review your case.
Bankruptcy
It’s not a pretty option, but in some cases, it can get rid of tax debt. However, it’s often a long process, there are a lot of rules and it doesn’t always work, Klasing warns.
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- 1. Internal Revenue Service. Understanding a Federal Tax Lien.
- 1. Internal Revenue Service. Understanding a Federal Tax Lien. Accessed May 3, 2023.
- 3. Internal Revenue Service. 2022 IRS Data Book.
- 4. Taxpayer Advocate Service. Taxpayer Requests Collection Appeals Program. Accessed Sep 16, 2022.
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