IRS Tax Problems

What Is a Tax Lien?

What Is a Tax Lien?

A tax lien is when a government makes a claim on your property due to failure to pay taxes. The IRS can put a lien on your property, and so can any state or local tax authority if your taxes have gone unpaid. 

The Federal Tax Lien Process

A tax lien doesn't appear overnight. The process can vary depending on the state in which you live or do business in, but for federal income taxes, the IRS must follow a due process for tax liens. Contrary to popular belief, the IRS doesn't simply send an agent to your door to seize your property in the event that you didn't pay your tax bill on time. Due process for federal tax liens can take months and usually only results from not communicating with the IRS and going on a payment plan if you are unable to pay your balance. 

The due process entails assessing an amount of taxes owed based on what you entered on your tax return. In the absence of a tax return, the IRS will file a substitute return based on any available information in the system (such as W-2s filed by your employer or 1099s filed by financial institutions and companies that paid you for freelance work.)

Then a bill is generated based on this tax assessment along with applicable interest and penalties. The bill is sent to your last-known address with a payment deadline and terms. If you do not communicate with the IRS or make any payments by the due date, then the conditions have been satisfied for the IRS to file a Notice of Federal Tax Lien. This notice lets you and creditors know that your property is now under lien.

State Tax Liens

Every state has its own internal revenue code that defines what the due process is for state and local tax liens. In most cases, the process is similar to the one for federal tax liens. However, there may be differences in the lien process and getting it released when it comes to unpaid state taxes. These differences may allow for more time or circumstances in which you couldn't pay your tax bill, or they may be less liberal than the due process of the IRS since states are not subject to the standards set forth in the Internal Revenue Service Restructuring and Reform Act and other taxpayer protections from federal collection processes.

Tax Liens and Your Credit Report

Once the IRS or state tax authority has filed a lien notice, the lien will show up on your credit report. You may experience difficulties getting financing for your business or renting/buying a home, opening a new credit card, or other activities that request a recent credit report.

Depending on the amount of the lien, it can adversely affect your credit score. Even after you've gotten a tax lien released, it can stay on your credit report for up to 10 years, so you definitely want to avoid getting hit with a lien if you can.

Tax liens essentially give the government priority on not only being paid back, but also on seizing your property in the event that you still don't pay your tax bill. This will make other creditors not want to lend to you as a result.

The Difference Between a Tax Lien and a Tax Levy

The lien only gives the government the right to be the first entity to have legal claim to your property. Liens don't actually result in the government seizing your bank account, house or other assets.

However, a tax levy does result in these actions. A levy is what comes after a lien that has not been dealt with properly. If your tax bills remain unpaid and that lien is in place, then the IRS or state tax authority must follow the federal or state due process for a levy, file a Notice of Levy, and actually seize your property to repay the debt.

In summary, tax liens result from unpaid tax bills and simply offer governments priority in legal claims to your property over other creditors. The IRS has a due process for federal tax liens, but states have their own tax laws for due process and release.

For tax lien assistance from the IRS please call (877) 777-4778. If you need help from a reviewed tax resolution professional, check out our tax lien help overview.

 Lee Reams Sr., EA writes for TaxBuzz, a tax news and advice website. Reach him at [email protected] or on LinkedIn.

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Lee Reams, BSME, EA

Lee Reams, BSME, EA

Editor-in-Chief

Besides his role at CountingWorks as an educator and speaker to thousands of accountants nationwide, Lee manages a technical research service for a large group of tax accountants which sharpens his technical skills. Lee served on the Board of Blackline Systems, is a former Board of Director for the California Tax Education Council, is a Past President of the San Fernando Valley Chapter of Enrolled Agents, Member and Past Director for the California Society of Enrolled Agents.

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