What Is a Tax Lien? How It Works, How to Stop One
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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.
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.
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. There are some other options to consider as well:
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. (You’ll still have to pay your tax debt, of course.) You don’t necessarily need to hire anyone to get on an IRS 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
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. 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.
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.
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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