The Federal Tax Lien – What it is and What to Do

July 8, 2015

A powerful tool in the Internal Revenue Service’s arsenal is the tax lien. A tax lien is a legal claim against a noncompliant taxpayer’s property when they fail to pay their tax debt. Generally, the IRS will issue a lien only in a situation involving a tax liability in excess of $10,000.  The filing of a lien protects the government’s interest in a taxpayer’s real and personal property, including their financial assets, and can have a significant effect on a taxpayer’s credit and, thus, their ability to sell property or secure financing.

Fortunately, a tax lien is not the first step in the IRS collections process. When a taxpayer has not paid his or her tax liability in full, the IRS will send a written notice detailing the amount of tax due. Interest, compounding daily, and monthly late payment penalties will be added to the unpaid balance, so it is in the taxpayer’s best interests to respond at this stage. Failure to respond will cause the IRS to resort to more punitive actions to garner a taxpayer’s compliance: offsetting other tax refunds, filing liens or levies, and other collection actions.

When a tax lien is filed, it can be attached to a taxpayer’s current assets and all future assets that a taxpayer acquires. Yes, that brand new Mercedes may not technically be yours anymore. Need to get a loan or mortgage? Make sure all tax liens have been resolved, because a lien can negatively affect your credit rating and make it difficult to obtain credit in the future. In addition, a lien can also attach to business property, including accounts receivable. Even filing for bankruptcy may not extinguish a tax lien.

However, there are methods to get a lien released or withdrawn. The easiest way to remove a tax lien is to simply pay the debt in full. Once the tax debt and any associated interest, penalties and fees are satisfied, the IRS should release a lien within 30 days. You should note, however, that even a satisfied lien will remain on your credit report for seven years. If full payment is not feasible, the IRS will work with a taxpayer to establish an installment plan in order to settle a tax debt over time. In certain circumstances, the IRS will withdraw a lien – which will remove the public Notice of Federal Tax Lien – or subordinate the lien. A withdrawal or subordination will not remove a taxpayer’s responsibility for paying the taxes they owe, but will change the interest the IRS has in a taxpayer’s property, potentially making it easier for a taxpayer to satisfy their debt.

What happens if the tax lien is completely ignored? Unfortunately, the IRS will further unleash their fury and turn the lien into a levy. A levy allows the IRS to seize your funds or property in order to satisfy the debt owed.

If you have received a notice from the IRS stating that you owe additional taxes, or if you have been issued a tax lien, Aronson LLC’s tax advocacy practice can help. Please contact Patrick M. Deane, JD, MBA, LLM or Larry Rubin, CPA at 301-231-6200 for further assistance.