Federal Tax Liens Explained

Posted by CourthouseDirect.com Team - 20 May, 2020


federal_tax_lienA federal tax lien can tie up your assets and property, making it difficult to get a loan. In addition, your credit score takes a dive, and bankruptcy won't help you. 

Tax liens are one tool the IRS and the federal government have in their pocket to make sure everyone pays their income taxes. The government has that right. However, you will be given notice if the feds decide to put a lien on your personal property. 

Here is an overview of federal tax liens.

Defining a Federal Tax Lien

A lien is a financial instrument placed against an asset to block it from sale. The asset becomes collateral for payment, but the lien is applied after you miss a payment. 

A federal tax lien is a tool the IRS uses to compel payment of income tax debt. If you don't pay your income taxes due to refusal or negligence, the federal government places a tax lien against your personal property until you pay up. 

The IRS can place a lien against any assets you or your company own, even if acquired after the lien goes into effect. If you don’t pay your tax debt or make arrangements to pay it, the federal government can seize the assets under lien and sell them to pay the debt. 

Before the IRS places a lien on your property, it files a Notice of Federal Tax Lien, a public document that alerts creditors that the federal government has the legal right to your property. It says: 

“There is a lien in favor of the United States on all property and rights to property belonging to this taxpayer for the amount of these taxes, and additional penalties, interest, and costs that may accrue.” 

You receive a copy as well. The lien protects the government’s interest in all your property. 

  • Real estate 
  • Personal property 
  • Financial assets 
  • Vehicles 
  • Securities 

Pretty much anything you own that can be sold now belongs to the feds unless you pay up. 

Now, they don’t bestow these at will. The IRS places a lien only after assessing your liability and sends you a Notice and Demand for Payment. If you refuse to pay the debt on time, they slap a lien on your stuff. 

A lien is not the same thing as a levy. The lien secures the government’s interest in your property. A levy seizes the property to pay the tax debt. 

Interested in learning more about property liens? Download your copy of The Lien Handbook today »

How to Get Out From Under a Lien

The best way to get rid of a lien is to pay your tax debt. Once you do that, the IRS releases the lien within 30 days. If you are rather destitute, the agency may accept an Offer in Compromise instead. 

Other ways to get rid of a lien include discharge of property, subordination, and withdrawal. 

Discharge of Property Discharge of property removes the lien from a specific property, not all of your property. The IRS allows you to obtain a discharge of property on a particular asset if you meet eligibility requirements per Internal Revenue Code provisions so you can sell it to pay your tax debt. See Publication 783 Instructions on How to Apply for a Certificate of Discharge from Federal Tax Lien.

Subordination A federal tax lien places the IRS at the front of the line for access to your assets if needed to discharge a debt. All your other creditors must wait in line. However, you can file for a subordination, which doesn't remove the lien but allows other creditors to slip in front of the IRS. 

Subordination doesn’t get rid of a lien so much as it allows you the chance to obtain a loan or mortgage. Eligibility criteria apply. See Publication 784, Instructions on How to Apply for a Certificate of Subordination of Federal Tax Lien.

Withdrawal A withdrawal removes the public Notice of Federal Tax Lien and lets other creditors know they won't have to compete with Uncle Sam for your property. Unfortunately, you're still liable for your tax debt. Again, eligibility criteria apply. 

It doesn’t remove the lien; it just removes the public notice of it, so your creditors have a chance at your assets. Use Form 12277 Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien.

The Impact of a Federal Tax Lien on Your Finances 

Anytime your assets are tied up, you lose financial leverage for the duration of the lien. 

  • It limits your ability to obtain credit. 
  • Your credit score is liable to get downgraded. 
  • The lien can be attached to all business property and all rights to business property, including accounts receivable. 
  • Filing for bankruptcy will not get rid of a lien. The Notice of Lien may continue after your bankruptcy proceedings are complete. 

The IRS has first dibs on your assets, and it doesn’t let go easily. 

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How to Avoid a Lien 

Obviously, the best way to avoid a lien is to file and pay your taxes on time and in full. Also, don’t ignore notifications from the IRS. However, if you are in desperate financial straits, or just can’t quite pay the whole thing, you have some options. 

You can take advantage of one of several IRS options for paying over time. The agency offers an individual payment plan and a business payment plan to help you stretch your tax payments out to something more manageable. 

Depending on how much you owe, you may qualify to apply online for a short-term plan where you pay your bill over 120 days or less. You must owe less than $100,000 in combined taxes, penalties, and interest. If you owe $50,000 or less and wish to pay over more than 120 days, you may qualify for a long-term plan online. 

Other options are available if needed. You may be eligible for an Offer in Compromise, in which you pay a fraction of what you owe. However, you should consult a tax specialist to help you through it. 

The IRS places a federal tax lien on your property to compel you to pay a past-due tax debt. The lien prevents you from selling any property unless you are eligible for a Discharge of Property. The IRS creates a public notice that your property and assets are on hold and unavailable for seizure or sale by any other creditor. 

You can’t get rid of a tax lien through bankruptcy. The only way to get rid of it is to pay your debt or allow the IRS to seize and sell your assets. The best way to avoid a lien is to always file and pay your income taxes. It’s as simple as that.

Property Lien Guide

Topics: Mortgage, Legal, Finance

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