How Does a Tax Lien Work?

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How Does a Tax Lien Work?

What Is a Tax Lien?

A tax lien is a legal claim made against the assets of a person or corporation that fails to pay government taxes. A lien, in general, helps to secure the payment of an obligation, such as a loan or, in this example, taxes. If the obligation is not met, the creditor has the right to confiscate the assets.

Key Takeaways

  • If a taxpayer does not respond to a demand for payment, the government may place a lien on the person’s assets.
  • The lien may be lifted if the taxpayer agrees to a payment plan or takes other action with the government’s approval.
  • If no effort is made to repay, the government may take and sell the assets.

Understanding a Tax Lien

If the owner is behind on income taxes, the federal or state government may impose a tax lien on the property. For nonpayment of property or local income taxes, local governments may establish a lien on a property.

The presence of a lien does not imply that the property will be sold. Rather, it assures that the tax authorities has first claim on the creditor’s assets before any other creditors.

The Process of a Tax Lien

The procedure starts when a taxpayer receives a letter stating how much money is owing. A notification and demand for payment is what this is called.

If the taxpayer fails to pay the debt or tries to settle it with the Internal Revenue Service (IRS), the government may levy a lien on the person’s assets.

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 existence are likewise subject to the lien. It also attaches to any commercial property as well as the company’s accounts receivable.

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If the taxpayer files for bankruptcy, the lien and tax liability may persist even after the bankruptcy. Most obligations are discharged in bankruptcy, but not federal tax debt.

What the IRS Can Do

In the United States, if federal tax payments are late and there has been no apparent attempt to pay the taxes owing, the IRS may issue a lien against a taxpayer’s house, car, and bank accounts.

All other creditors’ claims are superseded by a federal tax lien. It also makes it harder for the taxpayer to sell or receive financing for the assets.

The only method to remove a federal tax lien is to pay the tax in full or strike an agreement with the IRS.

Once a lien was issued, it would appear on the taxpayer’s credit record, lowering the person’s credit score. This might also hinder the taxpayer from selling or refinancing assets that have liens linked to them. It is worth noting that the three main credit reporting companies have discontinued showing tax liens on credit reports since 2018.

The lien will stay in effect until the tax bill is settled or the debt’s statue of limitations expires.

The IRS has the right to confiscate a taxpayer’s assets if he or she ignores a tax lien.

Getting out of a Tax Lien

The most straightforward approach to remove a federal tax lien is to pay the taxes owing. If this is not practicable, there are additional options for dealing with a lien with the IRS’s assistance.

  • The IRS will consider lifting a tax lien if the taxpayer agrees to a payment plan that includes a monthly automatic withdrawal until the obligation is paid.
  • The taxpayer may be able to discharge a particular property from the lien. Not all taxpayers or properties qualify for a discharge. The requirements for discharging property are detailed in IRS Publication 783.
  • Subordination does not eliminate the lien from any property, but it might make it simpler for the taxpayer to acquire another mortgage or loan. To apply for such action, utilize IRS Form 14134.
  • Another procedure, notice withdrawal, eliminates the public notification of a federal tax lien. The taxpayer is still responsible for the debt, but the IRS does not compete with other creditors for the debtor’s property under withdrawal. The application is Form 12277.
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If repaying the taxes is just impossible, the taxpayer must pay as much of the obligation as feasible before filing for bankruptcy.

What Happens Next

If the taxes are not paid, the tax authorities may legitimately confiscate the taxpayer’s assets in order to collect the money owing.

A lien protects the government’s interest or claim in the property, but a levy authorizes the government to confiscate and sell the property to satisfy the tax obligation.

Once It’s Over

Tax liens are made public. When a tax debtor pays up the obligation, the county records are amended to indicate the discharge of the lien.

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