What Is a Tax Lien?

A tax lien is a legal claim by a government entity against a noncompliant taxpayer's assets. Tax liens are a last resort to force an individual or business to pay back taxes.

 A lien serves to guarantee an underlying obligation, such as the repayment of a loan, or in this case taxes. If the underlying obligation is not satisfied, the creditor or obligator may be able to seize assets or garnish income that to remove the lien.

How Tax Liens Work

A government can place a tax lien on a property if the property owner is not making his or her property tax payments or is owing on income taxes. In other words, federal and state governments may place tax liens for unpaid income taxes, while local governments may place tax liens for unpaid local income taxes or property taxes. The lien does not mean that the asset will be sold. Instead, it ensures that the tax authority gets first claim over other creditors vying for the individual’s or business’ property.

In the United States, if a taxpayer becomes delinquent and does not demonstrate any indication of paying owed taxes, the IRS may place a legal claim against a taxpayer's property, including his home, vehicle and bank accounts. A federal tax lien has precedence over all other creditors' claims. It also affects the taxpayer's ability to sell existing assets and to obtain credit. The only way to release a federal tax lien is to fully pay the tax owed or to reach a settlement with the IRS. The IRS has the authority to seize the assets of a taxpayer who ignores a tax lien.

After a lien has been filed, it will show up on the offender’s credit report, negatively impacting an individual’s credit score and making it difficult for him or her to secure additional loans. In addition, a tax lien prevents the taxpayer from selling or refinancing the assets to which liens have been attached. The lien remains in place until the tax liability is paid off or the statute of limitations on the debt expires.

Key Takeaways

  • A tax lien is a financial imposition placed by the government on an individual or business who is delinquent in paying back taxes.
  • A federal tax lien will have precedence over any other obligations or liens placed on an individual.
  • A tax lien requires back taxes to be paid in full, along with any penalties and interest due, before it is discharged.
  • If a tax lien is not satisfied, individuals can be subject to fines, wage garnishment, or jail time.

Getting Rid of a Tax Lien

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. 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 details regulations about discharging property. Subordination does not actually remove the lien from any property, but it sometimes makes it easier for the taxpayer to obtain another mortgage or loan.

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 does not compete with any other creditors for the debtor’s property.

If one is simply unable to repay back taxes, to get rid of a lien the taxpayer must pay what he or she can muster, get the debt dismissed in bankruptcy court, or reach an offer in compromise with the tax authorities. Tax liens are publicly recorded. After a tax debtor pays off the debt, the county records will be updated to reflect the fact that the lien has been released. However, the claim will remain on the entity’s credit report for up to 10 years, but the taxpayer is free to notify the credit agency of his or her settlement. When conditions are in the best interest of both the government and the taxpayer, other options for reducing the impact of a lien exist. For instance, the Internal Revenue Service (IRS) will consider releasing a tax lien if the taxpayer agrees on a payment plan which would automatically withdraw money from his or her account on a monthly basis to satisfy the outstanding tax debt.

If the taxes remain unpaid, the tax authority can use a tax levy to legally seize the taxpayer's assets (such as bank accounts, investment accounts, automobiles, and real property) in order to collect the money it is owed. While a lien secures the government’s interest or claim in an individual’s or business’ property when the tax debt remains unpaid, a levy actually permits the government to seize and sell the property in order to pay the tax debt.

Federal Tax Liens

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. The IRS then, if it chooses, exacts a lien on the person's assets if 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 also apply. 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 notable, since bankruptcy otherwise wipes out a person’s