Federal Tax Lien Definition

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Federal Tax Lien Definition

What Is a Federal Tax Lien?

A federal tax lien is the power of the United States government to detain or seize a person’s personal property until delinquent federal taxes are paid. The IRS will issue a notice of federal tax lien, which acts as a demand for payment. If taxes are not paid on time, the IRS will impose a federal lien on personal assets.

Key Takeaways

  • A federal tax lien refers to the federal government’s power to confiscate property in the event of unpaid back taxes.
  • A federal tax lien may be filed on any assets possessed by a person or corporation that owes past taxes, even those acquired during the lien period.
  • Discharging property, applying for withdrawal, and entering into subordination agreements are all temporary solutions to a federal tax lien.
  • The easiest method to deal with a federal tax lien is to pay the whole back tax sum.
  • A federal tax lien differs from a tax levy in that the latter is the act of taking the property covered by the lien.

How a Federal Tax Lien Works

When the IRS assesses a taxpayer’s obligation, a federal tax lien is created. They then issue the taxpayer a bill outlining the amount owed. This is referred to as a notice and demand for payment. If the IRS chooses to do so, it will levy a lien on personal assets if the taxpayer fails to pay the amount on time, whether by carelessness or unwillingness.

This lien is attached to all of the assets of a taxpayer, including securities, real estate, and cars. Any assets acquired by the taxpayer while the lien is in place might also be allocated to the lien. The lien extends to any business property, rights to business property, and accounts receivable. If the taxpayer decides to file for bankruptcy, the lien and tax liability are often carried over. This is an important aspect of a federal tax lien since bankruptcy would otherwise wipe off a person’s obligation.

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Federal tax liens are distinct from tax levies in that they simply reflect the government’s power to collect property rather than its actual seizure. The IRS will often “perfect” a tax lien by alerting individual states and other creditors that it is first in line to obtain payment for the unpaid taxes. Federal tax liens tend to significantly lower an individual’s credit score, and in many situations, persons with a tax lien must pay taxes in full before regaining access to any kind of financing.

The IRS will usually discharge a lien after 30 days of receiving complete payment for the outstanding taxes.

Special Considerations

The easiest approach to remove a federal tax lien is to pay all of the taxes owing on time. However, if this is not practicable, there are alternative options for dealing with a lien. The taxpayer, for example, may discharge a certain property. This implies that the lien is removed from a particular piece of property, such as a house. However, not all taxpayers or assets are dischargeable. Publication 783 expands on the rules governing the discharge of property in the context of fighting a lien.

A subordination arrangement is another example of an attempt to be made against a federal tax lien: in a subordination agreement, the IRS agrees to position itself below another creditor in terms of priority. Although subordination does not eliminate the lien from any property, it might make it simpler for the taxpayer to secure a new mortgage or loan. Finally, a person who owes the federal government may request that their lien be released. Withdrawal eliminates the need for a public notification of a federal tax lien. The taxpayer is still responsible for the debt, but under withdrawal, the IRS will not compete for the debtor’s property with any other creditors.

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