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Tax liens (and their cousins, tax levies) 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.
What is a tax lien?
A tax lien is a claim the government makes on your property, including real estate and other assets, when you’re past due on your income taxes.
If you don’t take care of a federal tax lien, a tax levy could come next. A tax levy is the actual seizure of property to pay taxes owed. Tax levies can include things such as garnishing your wages or seizing assets and bank accounts. (If you’re wondering how long it might be before the IRS notices you haven’t paid your taxes, read this.)
What does it mean if you have a tax lien?
If you owe back taxes and the IRS socks you with 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. Note: New automatic, systemic liens and levies were temporarily suspended between April 1, 2020, and July 15, 2020, as part of the government's ongoing coronavirus response. For more details, see the IRS guidelines.
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.
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How to get a tax lien removed
Pay your tax bill. Sounds obvious, but in most cases paying your back taxes is the only way to stop a tax lien or tax levy. “The most important thing I can tell you is cooperate with the collection action. If they ask for something, you give it to them. If they reach out to you, reach back. Communicate with them,” Klasing says.
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 convince the IRS to withdraw the federal tax lien from public record. (You’ll still have to pay your tax debt, of course.) You don’t necessarily need to hire anyone to get on a payment plan — you can apply right on the IRS website. Fees run from $0 to $225 depending on the plan and your income.
Ask for an Offer in Compromise. This is an offer to settle your back taxes for less than the full amount you owe. Beware: There are lots of rules, and the IRS typically accepts fewer than half of the applications it gets in a year. To even be considered, you need to have filed all of your tax returns, plus make required estimated tax payments for the current year. You also won’t be considered if you’re in bankruptcy or are being audited. The IRS has a handy tool to show you whether you might qualify.
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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