What is a Tax Lien. Why IRS Uses Federal Tax Liens

IRS tax lien

What is a Tax Lien?

The IRS places tax liens on property in order to help secure payment of taxes that are owed. A tax lien is the government’s claim to your property. Once a notice of federal tax lien is filed it attaches to just about everything you own, have rights to, or that property has rights to. This means that if you try to sell or make money off of your “property”, the IRS has the right to take its cut to cover the amount of taxes owed, plus interest and penalties. A tax lien will remain in effect until the liability for the amount assessed becomes satisfied or becomes unenforceable by reason of lapse of time.

When the IRS will Impose a Tax Lien?

The IRS will impose a tax lien when there are unpaid tax amounts and you have failed to pay or take action when the IRS sent a notification. The IRS states that they may file a notice of federal tax lien only after the following three steps have been made:

  • The IRS assessed you with a tax liability
  • The IRS sent a notice to demand payment of the tax liability
  • You did not pay the debt in full within 10 days after you were notified about the tax liability

Once the IRS takes these three steps they can file a notice of federal tax lien. A lien will then be placed on your property for the amount of taxes owed plus interest and penalties. The IRS will not check to see what property you own before filing it because it doesn’t matter to them. Once the lien is filed it will cover any assets you currently own or any assets you may own in the future.

Effects of a Federal Tax Lien once it is Recorded

Once the notice of federal tax lien is recorded all of your creditors are notified that the IRS has a claim against all of your property and all property that is acquired after the lien is filed. The IRS has some of the most powerful collection mechanisms and even if you owe other creditors, the IRS is typically a priority over them. For that reason, it will make it nearly impossible to borrow or make large purchases in the future.

  • Example: If you want to buy a home and you borrow money from the bank, that bank typically will have dibs on your house if you cannot pay your mortgage, but once you have a tax lien placed on your property and future property the bank will no longer have first dibs, the IRS will. For this reason the bank views you as being too risky and will not lend money because they will require more risk in lending you the money.

Once a lien is placed it will be nearly impossible to hide it from creditors because it will be easily accessible to the public through public records and tax lien notices are picked up by all the major credit reporting agencies. So in essence, a lien severely impacts your credit rating and may make it extremely difficult to get a house, buy a car, get a new credit card or sign a lease.

Fortunately, at the beginning of 2011 the National Taxpayer Advocate released a report that may have led to the IRS making changes to their tax lien policy (which will be reviewed in a year). Basically, in most cases, the IRS increased the tax debt threshold for issuing a tax lien from $5k to $10k, and made it easier for taxpayers who owe less than $25k to have a tax lien withdrawn after a few successful direct debit Installment Agreement payments are made. For anyone who paid off their taxes or resolved them, but are facing the negatives consequences of their credit showing that a tax lien was “released,” can request to have the tax lien withdrawn. Again, the taxpayer needs to request it from the IRS.

Property Subject to Tax Liens

The federal tax lien will attach to all property owned by the taxpayer as well as all rights to property. This includes all future purchases or property acquired after the lien was placed. The wording is kept really broad to allow the IRS to attach the lien to anything that could be of value. Property can include both tangible and intangible items. With that being said there is no complete list of property that is subject to a tax lien because it really can be anything. Below is a list of common property effected by a tax lien.

  • House
  • Motor Vehicles
  • Accounts Receivable
  • Rental Income
  • Securities

The purpose of the tax lien is to make the taxpayer pay the taxes they owe. The IRS tries to make it so it is easier for the taxpayer to pay off the taxes they owe or to come to some sort of tax settlement with the IRS rather than trying to live with the effects of the tax lien.