What Is a Tax Lien?

A tax lien is a legal claim against the assets of a business or individual that fails to pay taxes to the government. Broadly, a lien gives a debtor, or someone owed money, a claim on a piece of property. If obligations are not met, the creditor may proceed to seize the asset or force foreclosure.

The federal government can place a tax lien on a property if the owner is in default on income taxes. A state tax lien can also be placed for unpaid income taxes. Local governments may place a lien on a property for back taxes or unpaid property tax, as well as unpaid local income taxes. Liens are recorded in the county where an individual owns the property.

This does not mean the property will be seized and sold, however. Rather, It certifies that the tax authority receives first claim over any other creditors contending for the asset, like a mortgage lender. 

Unlike other liens, such as a mortgage, which only attaches to the real estate, a tax lien essentially attaches to all assets a taxpayer owns. If you sell these assets while you have a tax lien, the proceeds from the sale must be paid to the IRS or other tax authority. 

A tax lien may be removed if the taxpayer pays the debt or agrees to a payment plan. If no attempts for repayment are made, the government may seize the assets and sell them to cover the debt. 

What Happens if a Tax Lien is Placed on my Property?

When a tax lien is placed on personal property, the taxpayer receives a notice of federal tax lien and demand for payment. If the taxpayer fails to pay the debt or resolve the issue with the Internal Revenue Service (IRS), the agency will proceed to place a lien on the individual's assets.

Commonly, the lien is assigned to all of the taxpayers assets, such as securities, real estate, and automobiles. Further assets the taxpayer acquires while the lien is in effect will also apply. In addition, the lien is associated with any real estate business properties and accounts receivable for the business.  

If the taxpayer elects to file bankruptcy, the lien and tax debt could potentially continue after the bankruptcy. Most debts are extinguished by bankruptcy proceedings, but federal tax debt is not. 

The IRS’s Proceedings

In the United States, the IRS generally will place a lien against the taxpayer’s bank accounts, real estate, and vehicles if federal tax payments have reached delinquency and there have been no efforts to pay owed taxes. A federal tax lien has precedence over any other creditor’s claims and can lead to issues for the taxpayer when they go to sell assets or obtain credit. The only way to discharge a federal tax lien is to fully remit delinquent taxes or reach a settlement with the IRS.

Upon a lien being filed, it will appear on their credit report and negatively affect the taxpayer’s credit score. This prevents the taxpayer from refinancing real estate or selling any assets associated with the liens. 

How Can You Get a Tax Lien Released?

The most straightforward route to get out of a federal tax lien is to pay delinquent taxes. Though, if this is not a possibility, there are other ways to manage a lien with the cooperation of the IRS.

The IRS will consider releasing a tax lien if the taxpayer agrees to an installation agreement with a monthly automatic withdrawal until the debt is settled. If tax payments are unfeasible, the taxpayer must pay a round sum and seek dismissal of the balance in bankruptcy court. 

If there are unpaid taxes, the tax authority can use a tax levy to legally seize the taxpayer’s assets in order to collect the unsettlement. A lien secures the government's interest or claim in the property; a levy permits the government to seize and sell the property in order to pay the tax debt. Upon completion, tax liens are publicly recorded. After the tax debtor pays off the debt, the county records will update to reflect that the lien has been released.

Does a Tax Lien Affect Your Credit Score?

In April 2018, the three major credit bureaus decided to remove tax liens, both federal and state, from credit reports altogether. Therefore, tax liens no longer influence credit scores. Previously, unpaid tax liens could be on the individual’s credit report for up to 10 years, while paid liens could remain for up to seven years after being released. 

Under FICO’s traditional model, an individual's credit score depends on various factors, including credit card and loan payment history, credit utilization, length of credit history and more. A tax lien was considered a severe derogatory item, much like bankruptcies, judgments, collections, charge-offs, and repossessions. Bankruptcies can drop a score by over 200 points and remain on the individual’s credit report for 10 years. Foreclosures can lead to a drop of over 140 points and remain for seven years.

When a debtor has satisfied a tax lien by remitting payment, bureaus will generally update the credit file within 24 hours of notice. According to the IRS, a lien is released 30 days after payment is made. However, settling unpaid tax debts does not immediately remove the lien from credit reports.

What If the Tax Lien Is Wrong?

Tax liens can be wrong, although it is rare. It could be a case of mistaken identity or the incorrect balance owed. If a tax lien filed against a taxpayer is incorrect, there are options to get the lien released or withdrawn.

Balance Incorrect

An incorrect lien balance may appear when the balance has been adjusted by the payments being made toward the debt. In this situation, a taxpayer legitimately owes tax for the period included in the lien, but the IRS does not adjust and re-record the lien balance to reflect payments made. It is normal to notice amount inconsistencies on the lien and the actual balance.

Erroneous Lien

An erroneous lien may appear when the lien covers a balance for a tax year in which an individual does not owe or involves a tax year for which the IRS is no longer legally allowed to collect. In the instance of erroneous liens, individuals automatically qualify for a lien release or withdrawal. However, proving that you don’t owe the tax can be difficult.
Contact the IRS to request a withdrawal based on one of these circumstances. The IRS generally has 10 years from the date a tax balance is accrued to collect. A tax balance accrues on the date of a tax return filing as it shows a balance due, on the date the IRS prepares a return for an individual (substitute for return) which shows a balance due, or on the date an individual accrues a balance through an audit of your return. There’s also the interest, which is charged at a five percent interest rate per quarter for underpayments.

The most recent date of these occurrences is used to calculate the date that collection activity will expire on the tax period. If the IRS prepares a return showing a balance and several years later files a replacement return for the same tax period which also shows a balance, the IRS will start the collection period over on the date an individual files a return.

Challenging Tax Liens 

You may have legitimately paid the tax but the government misrecorded your payment. Perhaps you didn’t get (or ignored) the letters from the IRS saying you still owed the money. If the IRS is satisfied with your proof they’ll remove the lien. If not, but you still believe you don’t owe the tax, you’ll have to contact the IRS Office of Appeals. You’ll then get an appeal hearing if they believe you have a valid reason, such as never receiving notices from the IRS or the tax debt being someone else’s, such as your spouse’s.  

Property tax liens are placed by local governments, such as a county, for unpaid property taxes. Property taxes are different from federal tax liens, where the former only applies to a certain piece of property. If a county places a property tax lien on a piece of property you own, but the unpaid tax is for a different piece of real estate you own, that lien has been wrongly misplaced. Each county has its own rules for challenging property tax liens. 

Automatic Release

In most cases, the IRS releases liens for periods which have been paid in full automatically within 30 days from the date of payoff. Automatic releases for periods which have been settled through alternate IRS programs also automatically release within this time period after all settlement payments have been paid. If there is a need to have the lien released sooner, a taxpayer can contact the IRS and request an immediate release.

What Is the IRS Collection Advisory Group?

The IRS's Collection Advisory Group is a special unit that handles lien-related inquiries. This unit processes lien release and withdrawal requests as well as lien-related matters including payoff amounts, subordination requests, and discharges. A lien subordination involves asking the IRS to take a step down in priority to allow another lien holder to take a primary position. The IRS may do this when the subordination allows your balance to be paid in full, such as through the refinancing of property attached to the lien. 

A discharge of the lien involves a request to remove the lien for less than what is owed to allow the property to be sold for less than the lien amount. The IRS may consider this when the value of assets attached to the lien is less than what is owed and therefore less than the IRS could expect to recover through its own sale of the assets.