What Is a Federal Tax Lien?

A federal tax lien is the U.S. government's right to keep or take a person's personal property until that person takes care of unpaid federal taxes. The Internal Revenue Service will send a notice of federal tax lien that serves as a demand for payment. However, if taxes go unpaid, the IRS will place a federal lien on personal assets. 

Key Takeaways

  • A federal tax lien is used to describe the federal government’s right to seize property in the case of owed back taxes. 
  • Any assets owned by an individual or company owing back taxes can be placed on a federal tax lien, including those acquired during the lien. 
  • Discharging of property, filing for withdrawal, and subordination agreements are temporary ways to address a federal tax lien. 
  • The simplest way to address a federal tax lien is to pay the total balance of back taxes. 
  • A federal tax lien is different from a tax levy, which is the actual act of seizing the property covered by the lien. 

How a Federal Tax Lien Works

A federal tax lien exists once the IRS assesses a taxpayer’s debt. They then send the taxpayer a bill that explains how much the taxpayer owes. This is known as a notice and demand for payment If it elects to do so, the IRS will then exact a lien on personal assets in the case that the taxpayer fails to pay the debt in time, either through negligence or refusal.

This lien attaches to all of a taxpayer’s assets, including securities, property, and vehicles. Any assets the taxpayer acquires while the lien is in effect can also be assigned to the lien. The lien also attaches to any business property, rights to business property, and accounts receivable for a business. If the taxpayer chooses to file for bankruptcy, the lien and the tax debt often continue even after the bankruptcy. This is a notable factor of a federal tax lien since bankruptcy otherwise wipes out a person’s debt.

Federal tax liens differ from tax levies in that they only denote the government's right to seize property, as opposed to the actual seizure of it. The IRS will often "perfect" a tax lien by notifying individual states and other creditors that it is first in line to receive payment for the back taxes in question. Federal tax liens tend to substantially downgrade an individual's credit score and, in many cases, those with a tax lien must pay taxes in full before regaining their ability to receive financing of any kind.

In most cases, the IRS will release a lien within 30 days of receiving full payment for the balance of taxes owed.

Special Considerations 

The simplest way to get rid of a federal tax lien is to pay all of the taxes owed in a timely manner. However, if this is not possible, there are other ways that a taxpayer can deal with a lien. For example, the taxpayer may discharge a specific property. This means that they remove the lien from a specific piece of property, such as a home. However, not all taxpayers or properties are eligible for discharge. Publication 783 further details the regulations surrounding the discharging of property as it relates to combatting a lien. 

Another example of an effort to be taken against a federal tax lien is a subordination agreement: under a subordination agreement, the IRS agrees to place itself behind another creditor in terms of priority. Although subordination does not actually remove the lien from any property, it sometimes makes it easier for the taxpayer to obtain another mortgage or loan. Finally, an individual in debt to the federal government can file for a withdrawal of their lien. Withdrawal does away with the public notice of a federal tax lien. The taxpayer is still liable for the debt but, under withdrawal, the IRS will not compete with any other creditors for the debtor’s property.