What Is a Tax Lien?

A tax lien operates in much the same way as any other lien that attaches to your property. Liens are a common way for lenders and other creditors to ensure they get paid back. For example, if you have a mortgage, a bank has a lien on your house, and a bank has a lien on your vehicle if you have an auto loan.

Much like other types of liens, a federal tax lien is simply a way that the Internal Revenue Service (IRS) ensures you don't profit from the sale of your property until your back taxes are paid by filing a legal claim against the property. The federal government is not alone in using tax liens. State and local governments regularly use them when a taxpayer owes money, such as from failing to pay local property taxes.

While filing a lien won't force you to pay your tax debt, it might make it challenging to secure a loan, refinance your home, or get a credit card. However, it usually won't appear on credit reports or impact your credit score.

What Is a Lien?

To understand tax liens, you need a general understanding of how they operate. A lien is a public notice giving a creditor the legal right to seize specific property and sell it if you fail to make full payment of money owed or meet other obligations. A lien can be placed against real estate, personal property, bank accounts, financial assets, and other property. When a business owes money, a lien can be placed against business property, equipment, or accounts receivable.

Most liens are filed with state or local governments, usually with the secretary of state or county recorder. Thus, liens are public records available so that potential buyers and lenders know the property is subject to an encumbrance.

The IRS Lien Process

The IRS will not place a lien on your property if you simply fail to pay your income tax bill on time. The Internal Revenue Code outlines specific steps in the IRS collection process that the agency must follow if a taxpayer fails to pay the amount shown on their tax return:

1. The IRS will assess a taxpayer's debt if they fail to make a tax payment.
2. The IRS sends a "Notice and Demand for Payment" explaining the tax debt and telling the taxpayer they must pay it.
3. The IRS files a "Notice of Federal Tax Lien" that alerts the taxpayer and their creditors that the government has a legal interest in their assets.

What if You Still Don't Pay?

If you still don't — or can't — pay your tax liability after the IRS files a tax lien against you, the agency will issue a tax levy. A tax levy is when the IRS actually seizes your property and sells it to pay your tax debt. Once a levy has been issued, the IRS has several collection alternatives, including taking a taxpayer's property and garnishing their wages.

Removing a Tax Lien

The easiest way to remove a lien is to pay your tax bill. If that isn't possible, there are still a few options available to reduce the impact of an IRS tax lien or remove it entirely. The IRS will allow taxpayers to utilize these options if it furthers the agency's interest in getting the most money possible from the taxpayer. Taxpayers can:

• File for a discharge of property: This allows a taxpayer to sell a piece of property free of the lien (most likely to pay off their tax bill).
• Apply for a Certificate of Subordination: The lien stays in place, but the IRS takes a back seat to other creditors. This can make it easier for the taxpayer to secure lines of credit.
• Apply to have the lien notice withdrawn: This erases the lien and makes it as if the lien had never been there in the first place.

Lien Withdrawal vs. Lien Release

A lien withdrawal differs from a lien release in two important ways. First, a lien release occurs automatically when a taxpayer pays off their debt to the IRS, while a taxpayer must apply for a lien withdrawal. Second, a taxpayer doesn't necessarily have to pay off their debt to obtain a lien withdrawal. A tax adviser or attorney may be able to secure a withdrawal if the lien was filed incorrectly, if the statute of limitations for collections has expired, or if the taxpayer's situation warrants it.

More Questions About Tax Liens? An Attorney Can Help

If you have questions about a tax lien, an experienced tax attorney can help. A local tax attorney may be able to challenge the lien, negotiate an installment agreement or other payment plan to release the lien, or get another form of tax relief.