Federal Tax Liens[yoast-breadcrumb]
Dealing with Federal Tax Liens: What You Need to Know
Hey there! If you’re reading this, chances are you’ve received notice that the IRS has filed a federal tax lien against you. I totally get it – dealing with the IRS can be scary and confusing. But don’t worry, I’m here to walk you through what a federal tax lien is, how it works, and what you can do about it.
What is a Federal Tax Lien?
Let’s start with the basics. A federal tax lien is a legal claim against your property that the IRS files when you owe back taxes. Here’s a quick rundown:
- The lien attaches to all your property, including real estate, personal property, and financial assets.
- It gives the IRS a security interest in your property.
- The IRS doesn’t need court approval to file a tax lien.
- The lien arises automatically when you don’t pay after the IRS sends a notice and demand for payment.
So in a nutshell, the tax lien gives the IRS the right to take ownership of your property if you don’t pay off your tax debt. Not the best situation to be in, I know.
When Will the IRS File a Tax Lien?
The IRS usually won’t file a tax lien unless your tax debt is pretty large – over $10,000. Here are some common situations when you could face a federal tax lien:
- You owe back taxes from prior years.
- You didn’t pay all your taxes for the current year.
- You underpaid your estimated quarterly taxes.
- The IRS audited you and says you owe more taxes.
The IRS also tends to file tax liens more quickly if they think you’re at risk of defaulting, like if you’re behind on payments or not responding to notices.
What Happens After a Tax Lien is Filed?
Once the IRS files a federal tax lien, here’s the gist of what happens:
- The lien is publicly recorded, usually with your state or county. This puts your creditors on notice that the IRS has a claim against your property.
- Your credit score will likely drop. Tax liens are one of the biggest credit score killers.
- The IRS can seize and sell your property if you don’t pay off the lien. They can take real estate, vehicles, business assets, financial accounts, etc.
- The lien stays in effect until your tax debt is paid in full or becomes unenforceable. A federal tax lien generally lasts 10 years.
- You’ll face trouble getting loans or credit until the lien is removed. Lenders see the lien as a red flag.
So in a nutshell, the tax lien gives the IRS a lot of power to collect the taxes you owe. It makes your financial life very difficult until it’s resolved.<h2>How Do You Get Rid of a Federal Tax Lien?</h2> The good news is you can get a federal tax lien removed once you’ve paid off your tax debt. Here are the main ways to get rid of a filed tax lien:
- Pay off your tax debt in full. This is the fastest way to remove a tax lien. Send payment to the IRS for the full amount you owe and the lien will be released.
- Enter into an IRS payment plan. Setting up an installment agreement or payment plan allows you to pay off your tax debt over time. The tax lien will be removed once you complete the payment plan.
- Apply for an IRS Offer in Compromise. This allows you to settle your tax debt for less than the full amount owed. If your offer is accepted, the tax lien will be immediately withdrawn.
- File for bankruptcy. Declaring bankruptcy can remove a federal tax lien if you qualify to have your tax debt discharged.
As you can see, the key is resolving the underlying tax debt through one of these options. The lien will be removed within 30 days of the debt being paid off or settled.
Can the IRS Seize Your Assets with a Tax Lien?
Yes, unfortunately the IRS can seize your assets once a federal tax lien is in place. They have the right to take possession of your property to satisfy your unpaid taxes.The IRS usually won’t seize assets right away though. First they’ll send you a Notice of Intent to Levy giving you 30 days to resolve the debt. If you don’t respond, then they can start seizing property like:
- Your house or other real estate
- Vehicles, boats, etc.
- Business assets like equipment and inventory
- Bank accounts and investment/retirement accounts
- Accounts receivables and commissions
- Licenses, rental income, etc.
It’s a terrible situation, I know. The threat of asset seizure is the IRS’s big stick to try to motivate you to pay your taxes.
Should You Try to Resolve the Lien Yourself?
Dealing with a federal tax lien is complex, with lots of rules and procedures. You have to respond promptly within IRS timeframes or things will get worse quickly.Because of this, I usually recommend getting help from a tax professional if you’re facing a federal tax lien. Here are some key reasons why:
- They understand all the intricacies of IRS collections and liens. It’s a tricky process.
- They can negotiate with the IRS on your behalf to resolve the lien. This saves you time, stress and gets better results.
- They know the different payment options and can help you choose the best one.
- They make sure you respond to all IRS notices on time and avoid costly mistakes.
- Their fees are generally very reasonable compared to the savings they can get for you.
So in summary, getting expert help is wise when dealing with a federal tax lien. The IRS can be an intimidating opponent on your own.
Can the IRS File a Tax Lien During a Payment Plan?
This is a common question. Unfortunately, the answer is yes – the IRS can still file a federal tax lien even if you’re making payments through an installment agreement or payment plan.Here’s why:
- The lien gives the IRS a secured interest in your assets as collateral for your tax debt. This remains in effect until the debt is paid off.
- It ensures the IRS gets paid first before other creditors if you default on the payment plan.
- The IRS worries that without a lien, you could sell assets or file bankruptcy before finishing the payments.
So in most cases, the tax lien stays in effect throughout the duration of your IRS payment plan. Then it’s released within 30 days of you completing all the payments.
Should You Pay the IRS or Your Mortgage if You Can’t Afford Both?
Oof, this is a tough situation that no one wants to be in. If you truly can’t afford to pay both your IRS tax debt and your mortgage, here are a few options to consider:
- Prioritize the mortgage. Having your home foreclosed would likely be more damaging financially than IRS collection actions. The IRS can seize assets, but at least you’ll have a roof over your head.
- Use your mortgage lender’s hardship options. Ask about a forbearance or loan modification to temporarily reduce or suspend your mortgage payments. This may free up cash for the IRS bill.
- Ask the IRS for more time. Request an extension or installment plan to spread out payment of your IRS debt over time. This prevents harsh collection while you sort out the mortgage issue.
- Consider credit counseling or bankruptcy. If you have excessive debts you can’t handle, talk to a nonprofit credit counseling agency or bankruptcy attorney. They can help you evaluate all your debt and payment options.
- Make partial payments to both. If possible, pay something to the IRS and mortgage lender each month to show good faith. Once you’re back on your feet, you can pay off the remaining balance.
I know it’s a predicament no one wants to face. The key is exploring every option possible to buy yourself more time or reduce payments. Don’t ignore either creditor or the situation will quickly escalate.
Can the IRS Garnish Your Wages for Unpaid Taxes?
Yes, a federal tax lien gives the IRS the right to garnish your wages in order to collect unpaid taxes.Wage garnishment is one of the IRS’s strongest collection tools. Here’s how it works:
- They send a wage levy to your employer, requiring them to withhold a portion of your paycheck and send it to the IRS.
- They can take up to 25% of your disposable income – that’s your take-home pay after deductions like social security.
- Your employer is required to comply. They will start withholding each pay period until the tax debt is paid off.
- The wage levy continues until the tax lien is fully paid or released.
Having your paycheck garnished creates financial stress. It’s critical to take action quickly if you get an IRS notice of intent to levy wages. Options include:
- Setting up an IRS installment agreement to break up payments.
- Applying for Currently Not Collectible status if you truly can’t afford to pay right now.
- Negotiating an Offer in Compromise to settle for less than you owe.
- Proving financial hardship that makes you unable to pay.
The key is taking prompt action. Don’t ignore a wage levy notice or the paycheck deductions will begin.
Can the IRS Take Your Tax Refund for Unpaid Taxes?
Unfortunately yes, the IRS can seize your tax refund if you have unpaid back taxes. Here’s how it works:
- When you file your tax return, the IRS checks for tax debt associated with your Social Security number.
- Instead of sending your refund, they apply it to the amount you owe.
- This happens automatically via their computerized system if you have a tax lien.
- Any remainder of your refund after paying the owed tax will be sent to you. If your refund is less than you owe, you’ll still have a remaining balance due.
Having your refund taken is no fun. But on the bright side, it’s an easy way to chip away at your tax debt without any effort on your part. You can also proactively request your refund be applied to back taxes you owe but haven’t been contacted about yet.<h2>Should You Use Your 401(k) to Pay Off IRS Debt?</h2> This is a tricky question. On one hand, 401(k) funds can be a quick and easy way to get the IRS off your back. On the other hand, raiding retirement savings can leave you financially vulnerable later in life.Here are a few factors to consider if you’re thinking of using your 401(k) to pay off IRS debt:
- How old are you? The younger you are, the more time you have to rebuild retirement savings. Using 401(k) funds is riskier the closer you are to retirement age.
- What are the 401(k) withdrawal penalties? You’ll typically pay a 10% early withdrawal penalty along with income tax on the amount taken out.
- Will it satisfy the entire tax debt? Make sure the amount you withdraw will fully pay what you owe so you’re not still stuck with IRS collection.
- Do you have other assets to use? It’s generally better to use non-retirement assets to pay the IRS if possible.
- Can you negotiate a settlement with the IRS for less than you owe? This allows you to preserve more retirement funds.
My general advice is to explore every other option before raiding retirement accounts. But the 401(k) can be a lifeline if you’ve run out of alternatives and need to get the IRS off your back. The key is proceeding with caution to limit the long-term financial damage.
Dealing with a federal tax lien is no fun, believe me I know! But now that you understand what it is and how it works, you can start exploring your options to get it removed. Don’t wait – take action ASAP! The sooner you start working on a resolution, the better. And don’t be afraid to get professional help to guide you through the process.I know it seems scary and hopeless right now. But thousands of taxpayers resolve IRS liens every year and get back on stable financial ground. You can do it too! Wishing you all the best in getting this monkey off your back.