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What is a Federal Tax Lien?

Updated on August 10, 2016

Federal tax liens are filed late in the IRS collections process. The IRS cannot file a lien until after it has assessed the amount a taxpayer owes (which in itself often takes a while), sent her a bill, and attempted other collections measures. Most people settle their IRS debts long before they reach that point. For those who don’t, however, no matter what their reasons may be, this is the next step in the process and the IRS will not hesitate to use it.

What is a Lien?

A lien is a public document filed in court and signed off on by a judge that gives creditors a legal right in a person’s property up to the amount of a debt owed. In the case of IRS debt, the lien is called a Notice of Federal Tax Lien, it is signed off on by a federal judge and then filed with your local county courthouse. As you can imagine, creditors other than the IRS use this system to secure their interests.

I’ll use a fictional Jane Doe as an example. Let’s say she owes $8,000 to the IRS. For various reasons, she hasn’t paid it or gotten onto a payment plan, so the IRS eventually files a lien against her. This lien gives the IRS an interest in all property she owns or acquires up to the amount of the lien. She cannot sell or otherwise dispose of a piece of property without paying off the IRS. This includes houses, vehicles, stocks, and other forms of property.

What happens if she decides to sell a piece of property? It depends on the selling price. Let’s assume she sells a car. If the selling price is $4,000, the entire $4,000 will go to the IRS and her tax lien will be reduced by the amount collected. If the selling price is $9,000, the IRS will be paid off and she will get the remaining $1,000.

If the taxpayer owns a business, the lien also includes all business assets and rights.

What Else Does a Lien Do?

A lien is a public document and is accessible by the public at large, including current and potential employers. It is also reported to the credit bureaus and reduces a taxpayer’s credit score. It also makes it hard or impossible to get a loan for anything until it is discharged.

How is a Lien Removed?

A lien can be removed either by paying the debt in full OR by making payment arrangements satisfactory to the IRS. The lien may also be discharged, withdrawn, or subordinated to get rid of it. The individual circumstances dictate how a lien is best removed. In most cases, filing for bankruptcy won’t help.

What Happens After the Lien is Filed?

If a taxpayer continues to disregard her tax debt after the lien is filed, the IRS will eventually move onto the next step of the collections process, which is one or more forms of asset seizure. While it is rare than the IRS will move to seize a house or other real property (no matter what the scaremongers say), they will NOT hesitate to garnish wages or clear out bank accounts.

If You’ve Had a Federal Tax Lien Filed Against You

…take care of the problem today. Don’t put off your tax problems any longer. They are only going to get worse. If you need help, hire a licensed professional. But take care of your IRS problems now.

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