IRS and State Tax Lien Guide
Table of Contents
- What is a Tax Lien or Notice of Federal Tax Lien?
- Property That is Subject to Tax Liens
- What is a State Tax Lien or State Warrant?
- Difference Between Tax Lien & Tax Levy
- Tax Lien Filing Process
- Impacts of an IRS Tax Lien
- Tax Lien Effect on Credit Report
- How to Find out if You Have A Tax Lien
- Appealing a Tax Lien
- How to Release, Withdrawal, Subordinate or Discharge a Lien
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When you owe back taxes, the IRS may issue a tax lien. If you’ve received a letter threatening a tax lien, you may be wondering what that means. Similarly, if the IRS has sent you a Notice of Tax Lien, you’re probably wondering what you should do. Here’s what you need to know.
What is a Tax Lien or Notice of Federal Tax Lien?
When the IRS files a notice of federal tax lien, you will receive IRS letter 3172. You will also receive a copy of 668Y, which is a copy of the actual notice of federal tax lien. A tax lien is a legal claim to your assets that the IRS issues when you owe back taxes. Once the IRS files a notice of federal tax lien, this lien attaches itself to just about all of your assets. A tax lien gives the IRS the right this property, and if you try to sell any of the property, the IRS has the authority to take the money, or it’s cut to pay your debt owed plus interest and penalties. A tax lien is similar to when you buy a home with a mortgage — the bank has a lien on your property, and if you don’t repay your loan, the bank has a right to take your home.
Property that is Subject to Tax Liens
A federal tax lien will attach to all of your assets as well as future assets that are acquired while the lien is in place. The notice of federal tax lien keeps the wording vague to ensure that the lien covers anything that can be of value that you own. There is no complete list published of what the lien can include, but below are some common assets covered by the lien.
- Homes (prior residence, vacation homes, rental homes)
- Future homes purchased while the lien is active
- Cars, trucks, motorcycles, & any other mode of transportation
- Investment income (including rental income, annuities & more)
- Jewelry and other personal effects that have value
- Accounts receivable
- Stocks, bonds, mutual funds & any other type of security
What is a State Tax Lien or State Warrant?
Most state tax liens work similarly to an IRS lien. However, they all have their own set of rules when it comes to debt amounts they will file them. States also use various names for liens, one common term is a tax warrant which is the equivalent of a tax lien. Each state also has its own rules on how they can be released, removed, discharged, or subordinated. Visit our State Tax Relief section to find information and links to resolve a state tax problem.
What is the Difference Between a Tax Lien & a Tax Levy
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Liens and levies are quite different and confused by many. A tax lien, either a state tax lien or federal tax lien, is a legal claim against your property which secures payment of back taxes owed. The lien means that they have a legal claim to the assets, but it doesn’t mean they immediately intent on seizing your assets. A tax levy is the actual seizure of your property to satisfy the back tax amount owed. A levy can come in many forms, the most general being wage garnishment and bank account levies.
Most of the time, the tax authorities file a lien before they levy. When they file a lien, it doesn’t mean that there will be a levy, but if action is not taken by the taxpayer to resolve the tax debt, then it is likely the tax authorities will eventually levy.
Tax Lien Filing Process
If you owe back taxes and don’t pay them, the IRS may issue a tax lien. Typically, the agency only issues tax liens when your debt is $10,000 or more, but there are some exceptions. Before issuing a tax lien, the IRS must:
- Assess your tax liability. Either by the taxpayer filing a return or the IRS filing a substitute return.
- Send you a demand letter, and give you 10 days to make arrangements.
- The taxpayer does not pay the bill or make an alternative resolution.
Once the IRS meets these criteria, they can file a tax lien with a local county recorder of deeds or the Secretary of State.
Impacts of an IRS Tax Lien
When the IRS issues a tax lien, your creditors get notified. On secured loans, the IRS’s claim to your assets doesn’t supersede your creditor’s claim to your assets. For instance, if you have a car loan, your lender has “first dibs” on your car, but the IRS has the right to any remaining value.
However, the tax lien does take priority over your unsecured debt such as credit cards. To explain, if you declared bankruptcy and had to sell your assets to pay your debts, the secured lenders would be paid first, the IRS second, and the other creditors third.
Your creditors don’t like this news. Once your creditors receive notice of your tax lien, they start to see you as a risk, and they get worried that you might not pay your bills. As a result, they may increase your interest rate. If you have credit cards or lines of credit, they may also reduce your credit limit.
Tax Lien Effect on Credit Report
Traditionally, tax liens appear on your credit report. That can lower your score and make it virtually impossible to get loans. However, as of April 2018, all three credit reporting bureaus have decided to remove all tax liens from credit reports. If you have a lien, that might boost your credit score, but it won’t necessarily make it easier to get loans. Your lenders can still search for public records of liens.
How to Find out if You Have A Tax Lien
Before issuing a tax lien, the IRS has to send a letter, but if you didn’t receive a letter, there are other ways to find out if you have a tax lien. You can call the IRS directly. The number for the centralized lien department is 1-800-913-6050. Expect long wait times, and make sure you have a copy of your last return to verify your identity.
You can also visit your Secretary of State’s website. Then, look for something that says “UCC search” or “lien filings.” If you don’t see either of those options on the homepage, look at the site menu, or do a Google search for “Secretary of State [your state] lien search.” In most cases, that should bring up the link you need. Once you find the right page, you can do a simple search for liens, just by entering your full name. You can also search based on a document number and a few other details.
Alternatively, to check for liens, you can contact the county clerk and recorder’s office. Keep in mind that the IRS likely filed a lien in the county of your latest address. If you’ve recently moved, check in the last county you lived. To find contact information for your area, search “county recorder [your county].”
You can also find liens using legal research databases such as LexisNexis. However, there is a charge for these services, and with so many free options, there’s no need to pay for information.
Appealing a Tax Lien
If you don’t agree with the tax lien, you can appeal. There are a few different ways to appeal your tax lien, and the right option depends on when the lien was placed and why you’re appealing. If you already paid your tax bill or if the IRS made a mistake, you should appeal. You can also appeal if your spouse is exclusively responsible for the tax debt or in a few other situations. Once you appeal, you usually handle the rest of the process through the mail or over the phone, but in some cases, you may qualify for a face-to-face hearing.
Law requires that the IRS notifies you when they file a Notice of Federal Tax Lien for each tax and period that you owe. You will have 30 days to request a hearing with appeals. On the lien notice, it will provide a day when the 30-day period expires. There are two main methods to appeal.
- Collection Due Process (CDP): This is generally the slower method of appeals, but gives a bit more flexibility if you don’t agree with the outcome. This type of appeal can be contested in the United States Tax Court.
- Collection Appeals Program (CAP): This appeal method is generally quicker than using the CDP option. With a CAP hearing, it is available before or after a notice of federal tax lien is filed. With this type of appeal, you cannot appeal to the tax court. The decision in a CAP hearing is binding to the taxpayer and the IRS.
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The IRS has different methods that can be used to decrease the impacts or completely stop the effects of a tax lien. They offer ways to release, withdraw or discharge, or subordinate the lien. It is best to talk with a tax professional to determine which method would work best for you given outcome you would like to achieve. Below are brief summaries of each way.
- Lien Release: A tax lien will be released when the tax debt is considered “satisfied” in one of a few ways. Some ways the IRS will regard the debt as satisfied is if the taxpayer pays the debt in full, the IRS accepts an offer in compromise, the statutes expire, or the taxpayer posts a bond. Once a lien is released, the IRS will also withdrawal from public record.
- Lien Withdrawal: With a lien withdrawal, this removes the public Notice of Federal Tax Lien. A withdrawal does not require the taxpayer to pay the debt in full. By removing this notice, it shows to creditors that they are not competing with the IRS for rights to your property. Withdrawal can make obtaining credit easier.
- Subordination of a tax lien: This happens when the IRS issues a Certificate of Subordination. Subordination allows another creditor to take priority over the IRS in claims to that particular asset. The lien will still remain in place on the asset, but the priority will change. The lien will also stay in place on all other assets other than the particular one defined by the Certificate of Subordination.
- Lien Discharge: This is when the IRS agrees to remove the tax lien from one specific asset completely. The lien remains in effect for all other assets. The IRS will only agree to this if the taxpayer meets particular criteria.
Releasing a Tax Lien
Of course, you can release a tax lien by paying your debt in full, but there are other options for releasing tax liens. The IRS will also release the lien if you set up a payment plan or file an offer in compromise. In some cases, you can release a lien by appealing. Releasing a lien will also withdrawal the lien from public record, but if you cannot pay your debt amount in full and you would like to limit the impacts of the lien, you can look at other alternatives to withdrawing the tax lien.
Withdrawal a Tax Lien
There are several ways you can go about withdrawing a tax lien depending upon your situation. Below are some of the standard methods.
- Direct Debit Installment Agreement: If you qualify for this type of payment plan with the IRS, many times the IRS will withdraw the Notice of Federal Tax Lien from public records.
- IRS didn’t follow correct procedures: There are various rules the IRS must follow to file a tax lien, if they didn’t follow the guidelines then it is likely the lien can be appealed. The IRS will withdraw the lien if the taxpayer proves they didn’t follow procedures.
- Convert a standard installment agreement to a direct debit installment agreement: If you now owe under $25,000 in taxes owed, you can convert to a DDIA. Having a DDIA will allow you to remove the tax lien.
- Prove removing the lien will facilitate IRS collections: You can use form 12277 to state your claim. Like if you need to obtain credit to get a car to secure a job.
- Pay debt in full
You can request to discharge a tax lien by completing Form 14135 (Application for Certificate of Discharge of Federal Tax Lien). Usually, you can get a lien discharged if the underlying asset is essentially worthless. For instance, if the IRS put a lien on your vehicle, and your car is worth less than the cost of selling it, you may be able to get the lien removed.
If you plan to sell the underlying asset, you may be able to get the lien discharged if you agree to pay the IRS after the sale. In most cases, tax liens apply to several different assets, and you can apply for a partial discharge which removes the lien from some of your assets.
Subordinating a Tax Lien
If you can’t get a tax lien discharged or removed, you may want to see if you can subordinate it. When the IRS agrees to subordinate a tax lien, that means the agency allows other liens to take precedence over the tax lien. Subordination can be useful if you need to refinance or take out a loan, and the lien is getting in the way. To apply, use Form 14134 (Application for Certificate of Subordination of Federal Tax Lien).
A lien is just a claim to your assets, but the next step is often a tax levy. That’s where the IRS takes your money or assets. Don’t let that happen. Instead, get help today. Call our toll-free number to talk with a tax specialist or fill out the contact form for more details. Our specialists have worked with people at all income levels who have owed all kinds of tax debt, and they can help you find the best resolution for your unique situation.