IRS Federal Tax Lien - Definition, Effects, & What To Do

IRS Tax Lien

What Is a Tax Lien?

A Tax Lien is the first major step the IRS takes against individuals in order to collect back taxes. A Tax Lien gives the IRS a legal claim to your property as security or payment for your tax debt. It is used in order to protect the government's interest in your assets.

When and Why is a Tax Lien Filed?

If you have unpaid back taxes and have not cooperated with the demands of the IRS to make the payments of the tax amount owed, it is likely that eventually you will receive a tax lien, which will then lead to a tax levy. Recently, the IRS will raise the debt threshold for issuing tax liens in most cases from $5,000 to $10,000 (policy change announced in 2011) largely due to the fact that tax liens can hurt taxpayers further and lessen their likelihood of getting into compliance with the IRS.

Here is how the process works. The IRS will first send you a letter with an assessment of your tax liability. This letter will typically state the amount that is unpaid as well as late payment penalty and interest. If the assessment letter is ignored, the IRS will follow up with four more letters, CP-501, CP-CP-503, CP-504, and finally LT11/L1058 in most cases. These letters will get more and more threatening as the numbers get higher. The final one of the CP letters mentions it's intent to levy. After these letters are sent to the taxpayer and there is no response or the tax amount is not paid, the IRS determines that they are not able to collect the tax the conventional way, so the IRS will then file a Notice of Federal Tax Lien (NFTL) and potentially move forward with a levy. Once you receive this tax lien, the lien has already been attached to your property. The purpose of the tax lien is to prevent you from selling or borrowing against any of the major assets that you own. With a tax lien in place, it gives legal claim to the IRS over that piece of property that the lien was placed and removes your rights to the property. Moreover, tax liens are public records.

Effects of a Tax Lien

A tax lien makes it very difficult to get any credit to make additional large purchases, such as a boat, car, or house. Having a lien placed on you by the IRS can be financially crippling for the time it is in place, it pretty much means you can't hold any assets in your name and you have to rely on other people for financing (as lien is on your credit too). All creditors would be notified including your mortgage company. A tax lien will stay in place as long as the IRS can legally enforce action against you (typically 10 years statute of limitations), or until your tax liabilities have been paid or settled with the IRS. The IRS becomes the highest of priority of creditors, so if you sold your house, car, or whatever property the lien was one and you had other liens on that property, the IRS would be the first to be paid.

If you do nothing about the tax lien, the IRS will eventually begin to seize your assets and sell them at a public or private sale. Once the IRS actually starts seizing your assets to satisfy the back tax liability, this is known as a tax levy. A tax levy is the most lethal weapon that the IRS possesses for collecting taxes.

One thing to note, is even when a tax lien is "released," and your public records are updated as showing the tax lien was released, the history or the fact that you received a tax lien the first place may still hinder your ability to borrow, get a job, rent a house and so forth. The IRS in February of 2011 announced policy changes, whereby in most cases tax lien can be withdrawn or expunged from public records if the taxpayer sets up a direct debit installment agreement (DDIA), has one already setup (they can just request to have lien withdrawn), and owes $25,000 or less. Of course, exceptions do happen.

What To Do About a Tax Lien?

It is best to take action as soon as possible when a lien is put in place. It is not a good idea to try to wait it out until the statute of limitations expires because most likely you will get a levy placed on you before then and the IRS will seize your assets before the statute of limitations expires. In order to release a tax lien you will have to file a tax return or file your back taxes (if you have not), then decide whether you want to pay your back taxes in full, setup a payment arrangement with the IRS, or settle your back taxes if your financial situation qualifies you.

IRS Tax Lien Relief Help & Info

Tax Lien Help
Do you need help with a Tax Lien? Remove a Tax Lien quickly with the assistance of our experienced team of tax professionals. Understand the benefits of hiring a tax professional to help with your lien.

How to Release a Tax Lien
A tax lien can be removed in many ways. The best method to use is determined by your financial situation.

What if I Receive a Notice of Federal Tax Lien?
What to do if you receive a notice of federal tax lien from the IRS. This is one of the first steps of the collection process and is important you respond in the right way to prevent future IRS actions.

Tax Levy
A tax levy is usually the next major action the IRS takes you. A levy could be in the form of a bank levy, wage levy (aka wage garnishment), or property seizure.

t be Offer In Compromise
A lien will be released if you file for an OIC. However, you must meet the strict set of requirements. If you do meet the requirements you can will be able to settle the tax amounts owed for far less than the original amount and the lien will be released.

IRS Payment Plans
Setting up a payment plan with the IRS can sometimes be the easiest solution to dealing with back taxes. See what payment plan fits your situation the best.