What You Should Know About Federal Tax Liens

Personal Taxes, Taxes
What You Should Know About Federal Tax Liens

By Craig Smalley

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When you don’t pay your federal taxes, the government will eventually file a tax lien against you. A tax lien is the first step the IRS takes to begin the forcible collection of tax debt. It secures the government’s right to your personal property.

Here’s a closer look at how the government files tax liens, what can happen after one is filed and how you can get one removed.

Tax assessment

To receive a lien, you first have to be charged a tax. Most people are familiar with this process. When you file your tax return and owe the IRS money, you’ve been assessed taxes. If you don’t pay the amount you’ve been assessed when you file, a lien could eventually come into play.

There is a statute of limitations on tax collection. The IRS has 10 years from the date of assessment to collect unpaid taxes.

Collections

If you fail to pay your taxes, the IRS will send you a letter every 30 days, called a Notice and Demand for Payment.

Eventually the IRS will send you one last letter, the Final Intent to Levy notice, indicating the agency’s intent to levy, or legally seize, your property to satisfy your tax debt. You have 30 days from the date of that letter to either pay your taxes or appeal the assessment.

If you haven’t paid or appealed within about nine months after the tax was assessed, the government will file a lien against you in court. A lien is a public document and is also called a Notice of Federal Tax Lien. It lets other creditors know that the government has a legal claim to your property. A lien covers all of your assets, such as your home, investments and vehicles, and it includes any property you acquire while the lien is in place.

What happens next?

Once the IRS files a lien, it can begin collecting on the debt by levying your bank accounts and property, such as homes and automobiles, and garnishing your wages, or seizing your accounts receivable, if you own a business.

A lien becomes a part of your credit history. Having one could cause you to be denied credit, and it could affect your spouse if the lien is attached to property you own together. In addition, it’s public information; your employer, clients or customers (if you’re self-employed) can find it.

What to do

To get rid of a lien, you have to satisfy your tax debt in full. You can do this by paying the debt or allowing the IRS to seize your property.

The IRS rarely removes liens unless you’ve paid the debt or the lien is hindering your ability to receive income. But depending on your circumstances and eligibility, the IRS might help you mitigate the lien. Options, as outlined by the IRS, include:

  • Discharge of property. This process removes the lien from a specific property named in a Certificate of Discharge.
  • Subordination. In this case, the lien remains, but other creditors are allowed to move ahead of the IRS. This could make it easier for you to get a loan or a mortgage.
  • Withdrawal. A withdrawal removes the lien and, thus, the IRS isn’t competing with other creditors for your property. You’re still liable, however, for the amount owed.

Once your tax debt is satisfied, you have to ask the IRS to remove your lien by filing a form. The lien should be removed within 30 days. And once it is, you’ll have to alert the various credit reporting agencies.

Fortunately, you can resolve tax debt issues before you ever receive a lien by asking the IRS:

  • For permission to pay your debt in installments.
  • To settle your debt for less than the amount you owe.
  • To be put on non-collectible status, if you’re unemployed or underemployed. That means that the agency will not try to collect taxes from you until your status changes.

Of course, it’s best not to receive a notice of a lien filed in the first place. But if you do, contact a tax professional who can help you understand your next steps.


Image via iStock.