How Tax Lien works

When a person fails or neglects to pay income taxes owed, the likely consequences involve the Internal Revenue Service (IRS) placing a federal tax lien on the individual’s property.

A federal tax lien is a claim that the United States government makes on the individual’s property where the government’s interest in the person’s property is protected.  This lien comes into effect after a series of steps: First, the IRS assesses the person’s liability as a balance due on its books.  Then, the IRS sends the person a Notice and Demand for Payment, a bill explaining the amount owed in taxes and a providing a deadline to pay the debt.  If the person neglects or refuses to pay the debt on time, then the IRS proceeds to file a Notice of Federal Tax Lien, which alerts the person’s creditors of the government’s legal right to the person’s property.  This means that the government has the right to satisfy the debt before any other creditor may do the same.

The consequences a person faces for having this lien placing on his property include:

  • The lien attaches to all assets (real estate and personal property), and not just current, but also any future assets acquired while the lien is in effect;
  • The lien limits the ability to obtain credit from financial institutions;
  • The lien also attaches to all business property and to any rights to business property, such as accounts receivable;
  • If the person files for bankruptcy, the tax debt and lien remain regardless of bankruptcy status.

Subsequent to the placement of the lien, the debtor must either pay the amount in full by the due date, or, if unable to pay in full, contact the IRS in order to reach a payment agreement.  The IRS allows debtors some options to remove the lien on their property:

  1. Apply for an online payment agreement to meet your tax obligation in monthly installments;
  2. An offer in compromise to settle for an amount lesser than one owed (this option is available under strict circumstances); and
  3. Have the debt be reported as currently not collectible to temporarily delay collection.

Once the debt has been paid, the IRS releases the tax lien 30 days later.  But, there are also for which a debtor may qualify in order to reduce the impact of the lien on the property.  The options include a “discharge of property”, which removes the lien from specific property.  A “subordination” is another option, but it does not remove the lien; instead, it allows other creditors to satisfy their debts before the IRS does, which may make it easier to obtain a loan or mortgage.  A “withdrawal” removes the public Notice of Federal Tax Lien so that the IRS does not compete with other creditors for the person’s property, but the tax debt is still due.