What Is a Tax Lien?
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?
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
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 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?
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?
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
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.
What Is the IRS Collection Advisory Group?
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.