What is a Tax Lien?


tax lien

A tax lien isn’t a joke. The IRS isn't pulling a prank on you, and telling you that your property is about to be seized isn’t their idea of a good time. 

If you owe back taxes, be assured the IRS will contact you with a Notice and Demand of Payment and give you a chance to square things with your taxes. If you don't, your next piece of mail is a Notice of Federal Tax Lien.

What the Heck Is a Tax Lien?

A tax lien protects the government's interest in your property. A tax lien also puts the IRS ahead of any other creditor who has eyes on your stuff. If you don't address the lien, you forfeit your property.

The government can place a lien against your property for back taxes of any kind, from income to business.

That’s right — federal tax law allows the IRS to seize your property if you fail to pay your back taxes. The agency can take your real estate, personal property, and financial assets to sell and reduce your liability. But first, they put a lien on your property, letting everyone know Uncle Sam has dibs on it.

The statute of limitations on a tax lien is ten years, but that is a flexible deadline affected by every appeal and challenge you make against the lien, so it could take much longer than a calendar decade for the lien to disappear this way.


How Does the Lien Work?

Whether you file taxes or not, the IRS has a pretty good idea of your income. If you don't pay your taxes, the IRS gets a little cranky and starts the process of "encouraging" you to pay.

First, you get a Notice and Demand for Payment. This document contains your tax balance, in case you don’t know how much you owe. The balance includes interest and penalties as well as the taxes due. If you don’t pay or make arrangements to pay, the IRS takes the next step.

It then sends a Notice of Federal Tax Lien, which becomes public record. The lien tells everyone, especially your creditors, that the IRS has the right to seize your property before your creditors do. The IRS also sends a notice of lien to your local government authorities, but without the details of the property under the lien. The Secretary of State of County Records Clerk then knows you have a tax problem.

BTW — the lien applies to all real and personal property and future assets you acquire during the lifetime of the lien, including accounts receivable.

If you hold a mortgage that contains an escrow account, your lender should pay your property taxes and send proof of payment each year. Be sure to keep up because an unscrupulous or sloppy lender may not perform as expected.

Homeowners who have paid off their mortgages are responsible for ensuring the payment of property taxes. If you receive any correspondence from the taxing authorities, don't ignore it.

The Impact of a Tax Lien

A tax lien can affect many parts of your financial life. In the first place, a lien might keep you from selling the property under lien. However, the existence of a tax lien has other repercussions.

Lenders can see you have a lien as part of the public record. Since the lien indicates you haven’t paid a bill, the lender will want to protect itself and charge higher interest rates on a loan or line of credit. A lien can also cause utilities and insurers to charge higher rates.

A tax lien shows up on a title search, creating problems with selling or refinancing your home. Any equity you have is taken to pay down your tax liability.

Finally, if you don’t pay your tax debt or otherwise resolve it, the tax lien becomes a tax levy, and the IRS begins proceedings to seize your property.

Once you pay off your tax debt, the lien may not be removed automatically. It can remain on your record for up to seven years if you don't intervene to ensure removal. 

Can You Remove or Release a Tax Lien?

Yes, you can get the lien removed or released, but only by paying off your tax bill, including interest and penalties. Once you resolve your tax debt completely, the IRS has 30 days to remove the lien from your property.

Before the Feds decide to attach a lien to your property, you can file for an extension if you know you can’t pay your taxes in April. An extension buys you six months to come up with the money or make other arrangements.

Other arrangements include Offers in Compromise and installment programs to either pay a lower amount than you owe or split up the amount into affordable monthly payments. Be aware that any unpaid tax balance continues to accrue interest and penalties.

To be eligible for an Offer in Compromise, you must be up to date on all tax filings, including the current year. Also, you must have paid all estimated taxes for the current year. If the government grants you the Offer in Compromise, it forgives the remaining balance. The tax lien is released but not withdrawn.

 However, you are not eligible for an Offer in Compromise if you are under audit or bankruptcy proceedings.


Appealing a Tax Lien

Maybe you believe the tax lien is in error, or you paid your taxes in full before the lien went into effect. If so, you can appeal the lien through due process in the IRS Office of Appeals. Begin by asking for a conference with the IRS employee’s manager and ask the Office of Appeals to review your case.

Justifications for appeal include:

  • You already paid the tax debt in full.
  • The IRS filed the tax lien while you were in bankruptcy.
  • The IRS didn’t allow you to dispute the lien.
  • The IRS had no cause to file a lien or filed it due to a processing error with your tax form.
  • The statute of limitations has expired.
  • You are eligible to participate in the Fresh Start Initiative or request Innocent Spouse Relief.

You have a limited time to request an appeal. If the lien is not yet in effect, you must file an appeal by the deadline listed in the lien notice. If it is already in effect, you have five days after the lien was filed to 30 days after it’s issued to request an appeal.

If the IRS denies your appeal request, you can ask for a judicial review from the US Tax Court within 30 days of the Appeals Office letter of determination. You can still file a request for an Equivalent Hearing if you miss the deadline. You have one year and five business days to make your request.

However, the Equivalent Hearing cannot block a levy, suspend the ten-year statutory limit, or allow you to go to court to appeal any decision by the IRS Office of Appeals. 

Other methods of removing a lien include subordination, withdrawal, and discharge of property. 

Bottom Line

If you owe back taxes, the IRS (and some state taxing authorities) can place a lien on your property or financial assets. Ignore the lien, and it becomes a levy, and the federal government can seize your property to pay your tax burden.

Top Tax Defenders can help. Contact us as soon as you realize you owe back taxes so we can work together on a solution.

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