Tax Liens 101: Everything You Need to Know

Federal tax liens are serious business. The federal government can initiate a tax lien against your property – including real estate, personal property, and financial assets – if you fail to pay your tax debt.

Tax liens arise after the government assesses your tax liability for a given year and sends you a bill explaining what you owe. This is called a Notice and Demand for Payment. If you don’t pay the bill by its due date, the Internal Revenue Service can start the lien process by filing a public document called a Notice of Federal Tax Lien. This notice alerts creditors that the government has secured a legal claim against your property and/or assets. A lien can bring about many adverse effects, including your ability to secure a loan or access credit, as well as stifle your ability to sell, refinance or manage a business.

Tax liens used to be reported on credit scores. However, beginning in 2017 the three primary national credit reporting agencies – Equifax, Experian and TransUnion – implemented changes to eliminate tax liens from consumer credit reports.

What is a Tax Lien Certificate?

Tax lien certificates are different from federal tax liens. Tax lien certificates are issued by county agencies or municipalities for unpaid property taxes or unpaid sewer and water bills. It’s a common problem – the National Tax Lien Association reports that approximately $14 billion in property taxes go unpaid annually. Tax lien certificates can be bought by individual investors through auction, which can further complicate the process of selling or refinancing a property since you won’t be able to move forward in either process until the lien is paid.

How Tax Liens Affect Property

A federal tax lien can inhibit your ability to sell or refinance your home, but it also can be much more onerous than that. The lien also attaches to personal assets such as your bank accounts, vehicles, and additional property that you may own. For business owners, the lien attaches to all business property, including accounts receivable.

While the IRS cannot force taxpayers to sell their property or business to satisfy a lien, the IRS is first in line to get paid on any proceeds if taxpayers do sell their hard assets.

How to Discharge a Federal Tax Lien

Tax liens will stay in place until the debt is paid, or the statute of limitations on the debt expires. The IRS can attempt to collect unpaid tax for 10 years. Alternatively, qualified taxpayers can enroll in the IRS Fresh Start program, which allows taxpayers to pay off tax debt over a six-year period. The program is available to both individual taxpayers and business owners who owe $50,000 or less. Taxpayers can either make payments on the full amount, or in rare cases the IRS will accept an Offer in Compromise, which is a settlement for less than the actual amount owed.

The best way to discharge a federal tax lien is to pay your tax bill in full, the IRS reports. Once paid, the IRS will release the lien within 30 days. Other options to shed a tax lien exist, however. These include:

• Discharge of Property. A discharge removes the lien from your property.
• Subordination. Although subordination does not remove the lien, it allows creditors to jump the line over the IRS, which can help individuals and business owners access credit or get a loan.
• Withdrawal. This process removes public notice of the lien. Taxpayers still are on the hook for taxes due, however.

How to Avoid Federal Tax Liens

The easy answer is to ensure you stay current on annual or quarterly tax payments. This includes any payments owed to the IRS through capital gains on your investments. Tax liens can disrupt personal and business operations, as well as impact your ability to access credit or get a mortgage. A lien stays in place for a decade, and often isn’t discharged through bankruptcy. The best way to avoid a tax lien is to pay your taxes on time and in full.

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