What to Do About IRS Tax Liens on Your Assets and Property[yoast-breadcrumb]
What to Do About IRS Tax Liens on Your Assets and Property
If you owe back taxes to the IRS, you may find yourself facing a federal tax lien on your assets and property. This can be a stressful and confusing situation. A tax lien means the IRS has a legal claim to your property if you don’t pay your tax debt. Here’s what you need to know about tax liens, and some options for resolving them.
What is a Tax Lien?
A federal tax lien is a legal claim the IRS makes against your property when you owe back taxes. This gives the IRS the right to seize your property to pay off your tax debt if you don’t resolve the lien. The IRS can place a lien on real estate, vehicles, bank accounts, business assets, and any other property you own or later acquire.
The lien secures the government’s interest in your property. It makes sure the IRS gets paid first before other creditors if you sell assets or declare bankruptcy. Tax liens can be placed on assets you owned before the tax debt accrued, as well as future assets you acquire after the lien is in effect.
How Tax Liens Happen
For a federal tax lien to happen, this is the basic process:
- You fail to pay your taxes on time. This could be for personal income tax or business taxes like payroll taxes.
- The IRS sends you a notice demanding payment and warning that further failure to pay will result in a tax lien. This is your chance to pay up before the lien happens.
- If you still don’t pay after 30 days from the notice date, the IRS can file a Notice of Federal Tax Lien. This is the actual lien document that gets recorded with your local county recorder’s office.
- The tax lien is now publicly searchable and attached to your credit report. It remains effective until the tax debt is paid in full or becomes unenforceable.
The Consequences of a Tax Lien
A federal tax lien can cause several financial and legal headaches:
- It damages your credit – Tax liens are one of the worst dings to your credit since it signals serious delinquency. This can lower your credit score by over 100 points.
- It makes borrowing difficult – Lenders usually deny credit or loans if they see a tax lien on your record. Even if you get approved, expect higher interest rates.
- It clouds property titles – You can’t sell or refinance assets with a clear title until the lien is removed. No one wants to buy property with an IRS lien attached.
- It lasts indefinitely – Unlike most debts, tax liens don’t expire after 7 years. The lien remains effective until the taxes are paid in full.
- It leads to levies and seizures – If the lien doesn’t get resolved, the IRS may escalate collection efforts through wage garnishment, bank account levies, or property seizures.
As you can see, it’s critical to take care of an IRS tax lien as soon as possible. The longer you wait, the more it can hurt your finances.
How to Remove an IRS Tax Lien
Now let’s discuss your options for getting rid of a federal tax lien:
Pay Off the Tax Debt
The simplest way to remove a tax lien is to pay off your balance due. This immediately settles the debt and releases the lien. However, if the amount is substantial, you may need time to come up with the money. The IRS may let you set up an installment agreement to gradually pay it off over several months or years. Make sure the payment plan is affordable for your budget.
Apply for Currently Not Collectible Status
If you truly can’t afford to pay anything right now, request that the IRS put your account in Currently Not Collectible (CNC) status. This pauses IRS collection efforts, including the lien, until your financial situation improves. To qualify for CNC status, you’ll have to prove you have little income left after paying basic living expenses. This usually requires submitting detailed financial statements. CNC status is temporary and your account will be reviewed every year.
Offer in Compromise
With an offer in compromise, you can settle your tax debt for less than the full amount owed. The IRS may accept an offer if there is doubt you can ever fully pay off the tax liability, or due to economic hardship. You’ll have to submit financial documentation and tax records proving your inability to pay. Offers can be complex to prepare. Consider hiring a tax professional for help.
File for Bankruptcy
Filing for bankruptcy does not make IRS tax debt disappear. But it may help remove a federal tax lien if you can get the debt discharged. To qualify for tax debt discharge, you must file under Chapter 7 or Chapter 13 bankruptcy. The taxes must also meet the IRS criteria for being legally dischargeable. Discharged tax debt is still subject to the 10-year statute of limitations for collections. Consult a bankruptcy attorney to see if this is a viable option.
Appeal the Lien
If you believe the tax lien was filed prematurely or in error, you can request a Collection Due Process hearing with the IRS Office of Appeals. You must appeal within 30 days from receiving your lien notice. Appeals can verify whether the lien is valid or have it withdrawn if appropriate.
Wait for Lien to Expire
If you don’t resolve the tax lien, it will eventually expire after 10 years from assessment under the statute of limitations for collections. The IRS can no longer enforce the lien after it expires. However, you will still owe the unpaid balance—the lien removal just stops the IRS collection powers. The 10-year clock only runs when the IRS formally assesses your tax liability. Paying even a small portion of the debt restarts the 10-year timer.
How to Prevent Tax Liens
Getting hit with a federal tax lien is a worst-case scenario. Here are some tips to avoid tax liens in the first place:
- File and pay taxes on time – File by the deadline and pay any taxes owed. At minimum, file your return even if you can’t pay.
- Request an extension – If you can’t file on time, get an automatic 6-month extension. Pay estimated taxes by the deadline to avoid penalties.
- Set up a payment plan – If you owe taxes, set up an IRS installment agreement to pay over time. This prevents lien filing.
- Respond to IRS notices – If you get an IRS notice, address it immediately. Waiting leads to escalated enforcement like liens.
- Keep an emergency fund – Have cash reserves to cover emergency tax payments if you face an unexpected liability.
- Hire a tax pro – Enlist help from a tax professional or attorney if you have a complex tax situation.
Dealing with an IRS tax lien is stressful. But taking prompt action to resolve it can help protect your financial health and assets. Prioritizing communication and working collaboratively with the IRS to address the tax debt can make the process smoother. With the right resolution approach, you can remove the lien burden and move forward.