What Is a Tax Lien?
A tax lien is a legal claim placed on an individual’s or business’s assets due to unpaid taxes owed to the government. It ensures that the government can collect the debt by claiming a priority interest over other creditors. If the tax debt remains unresolved, the government can seize the assets to satisfy the obligation.
Understanding a Tax Lien
Tax liens can be placed by federal, state, or local governments. A federal or state tax lien may arise from unpaid income taxes, while local governments can impose liens for nonpayment of property or local income taxes. The lien secures the government’s claim but does not automatically lead to the sale of the property.
The Process of a Tax Lien
The process starts with a notice and demand for payment sent to the taxpayer, detailing the amount owed. If the taxpayer fails to address the debt, the Internal Revenue Service (IRS) or relevant authority can place a lien on the taxpayer’s assets. This lien attaches to all current and future assets, including securities, property, vehicles, business property, and accounts receivable. Even in bankruptcy, the lien and tax debt may persist, unlike most other debts.
What the IRS Can Do
In the U.S., the IRS can place a lien on a taxpayer’s home, vehicle, and bank accounts if federal taxes are unpaid and no effort has been made to pay them. A federal tax lien takes precedence over other creditors’ claims and complicates the taxpayer’s ability to sell assets or obtain credit. The lien remains until the tax debt is fully paid or a settlement is reached with the IRS.
Previously, tax liens were reported on credit reports, damaging credit scores and hindering asset sales or refinancing. However, since 2018, major credit reporting agencies no longer include tax liens in credit reports. If taxes remain unpaid, the IRS can use a tax levy to seize and sell assets to cover the debt. The lien ensures the government’s interest, while a levy allows the seizure of property.
Getting Out of a Tax Lien
The simplest way to remove a federal tax lien is to pay the owed taxes. Once paid, public records are updated to reflect the lien’s release. If paying in full isn’t possible, several alternatives exist with IRS cooperation:
- Payment Plan: The IRS may release a lien if the taxpayer agrees to a payment plan with automatic monthly withdrawals until the debt is settled.
- Discharge of Property: Under certain conditions, specific properties can be removed from the lien. Eligibility is detailed in IRS Publication 783.
- Subordination: This process does not remove the lien but can make it easier to obtain another mortgage or loan using IRS Form 14134.
- Withdrawal of Notice: This removes the public notice of a federal tax lien but does not eliminate the debt. Form 12277 is used to apply for this withdrawal.
Bankruptcy: If repaying the taxes is impossible, taxpayers may seek dismissal of the balance through bankruptcy court after paying as much of the debt as possible.
Can Tax Liens Be Purchased?
In many areas, public tax debt can be sold through “tax lien sales” auctions. Third parties bid on and purchase liens from municipalities or states. The property owner then owes the unpaid taxes and interest to the third-party purchaser. Understanding tax lien investing and the local real estate market is crucial before engaging in such transactions.
How Long Can Property Taxes Go Unpaid?
The timeframe for delinquent property taxes varies by state, generally around two years before foreclosure.
Where Do I Find Liens?
To determine if a tax lien exists against a property, individuals can search state record offices or the attorney general’s office. The IRS’s Automated Lien System can locate liens against businesses. Private third-party services also offer lien research.
Conclusion
Tax liens are serious claims against an individual’s or business’s assets due to unpaid taxes. While they secure the government’s interest, they do not immediately result in asset seizure. However, if the debt remains unresolved, a tax levy can allow the government to sell the property to recover the owed taxes. Taxpayers can resolve liens by paying the debt, negotiating a payment plan, or seeking legal remedies like bankruptcy. Understanding the process and exploring available options can help taxpayers manage and remove tax liens effectively.
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