What is an IRS Tax Lien? How and Why the IRS Files Them

what is an IRS tax lien

What is an IRS Tax Lien?

A tax lien is the government’s legal claim to your property including property you obtain or have rights to in the future for the amount of the tax liability. The IRS files tax liens to secure payment of delinquent tax debt. When the IRS files a tax lien, it appears on your credit report, and it attaches to just about everything you own (automobile, house, and other assets). If you sell your property, the IRS has the right to take the proceeds of the sale to cover your tax debt, interest, and penalties.

The IRS’s Cincinnati campus hosts the Centralized Lien Operation. It is part of the IRS’s Small Business/Self-Employed Campus Compliance Services Operations (CCSO). It sends out Notices of Federal Tax Lien (NTFL) and Federal Estate Tax Lien. They process all lien notices and releases.  Moreover, they also assist IRS personnel in the field with processing withdrawals, refiles and revocations.

When the IRS Imposes Tax Liens

If you owe more than $10,000 and you have failed to respond to the IRS’s first balance due letter, the IRS usually issues a tax lien. In rare cases, the IRS may file a tax lien on tax debts worth less than $10,000.

How the IRS Tax Lien Process Works

The IRS files a tax lien if the situation meets the following conditions:

  • The IRS assessed you with a tax liability.
  • The IRS sent a notice to demand payment.
  • You did not pay the debt in full within ten days after the IRS notified you of tax liability.

Once the IRS takes these three steps, the agency can file a Notice of Federal Tax Lien for the amount of taxes owed plus interest and penalties.

Once the IRS files the NTFL document with a local county recorder of deeds or the Secretary of State, it applies to any assets you own now or in the future.  It notifies your creditors that the IRS has a legal claim to your current and future assets.

The NTFL is a document that can identify up to fifteen different tax liabilities assessed against you or your business.  It contains the last day the IRS can refile for each tax liability, which is usually ten years from the date the IRS assesses the liability plus 30 days.

Adverse Effects of a Federal Tax Lien

A tax lien also appears on your credit report with the consumer credit reporting agencies. That can lower your credit score and make it extremely difficult to borrow money.

To explain, imagine you want to borrow money to buy a home. When you take out a mortgage, the bank has your home as collateral. Therefore,  if you cannot pay your mortgage, the bank can take the property. However, if the IRS has filed a tax lien on your assets, the IRS has a priority claim over the mortgage company. It makes it risky for the bank to lend you money, and as a result, lenders usually turn down loan applications when you have a tax lien on your credit report.

It doesn’t just apply to mortgages. Federal tax liens make it extremely difficult to get car loans, take out new credit cards, or rent a home or apartment.

Property Subject to Tax Liens

A federal tax lien attaches to all property owned by the taxpayer as well as all property rights. That includes tangible as well as intangible property. It also consists of all future purchases and gifts you receive after the IRS files the lien.

Here are some common types of assets affected by tax liens:

  • Houses or other property
  • Motor vehicles
  • Accounts receivable (bills due to your company)
  • Rental income
  • Securities such as stocks and bonds

Getting a Tax Lien Removed

Tax liens stay in place until you pay your tax debt in full, the statute of limitations on collection expires, a bond guarantees payment or you fulfilled payments terms with an Offer in Compromise the IRS accepted. The IRS can also withdraw a tax lien if you make three successful payments on a direct debit installment agreement. However, a withdrawal is not the same thing as a tax lien release. If the IRS doesn’t withdraw your tax lien automatically, you need to contact the agency directly to request a withdrawal.

It is essential to understand that the Notice of Federal Tax Lien tells you your assessed balance but does not include charges for filing and releasing the lien.

The purpose of the tax lien is to convince you to pay your tax debt. Luckily, the IRS has various payment plans, settlement options, and penalty relief programs that make it easier to pay off your debt. To find out which option is best in your situation, contact one of our tax resolution specialists by calling for a free consultation.