Tax Lien

What is '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.

BREAKING DOWN 'Tax Lien'

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. 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.

To get rid of a lien, the taxpayer must pay what he or she owes, 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.