A Guide to Tax Liens

Katie McBeth
Tax liens
Reading Time: 5 minutes

There are few things in life more loathed than federal and state taxes. Making mistakes on your tax returns can result in a major burden on your life: an IRS audit.

The Internal Revenue Service (IRS) is known to be ruthless in its enforcement and pursuit of tax revenue. For example, multiple big-time celebrities have faced audits and lawsuits when their tax returns seemed to be off.

But the IRS is not entirely a nightmare. Many people are simply afraid because they do not understand how all the pieces fit together. Luckily, learning about all the fine details can help you relax.

Tax liens are one of the many pieces to the IRS puzzle that may cause serious stress to anyone who owes money. The parameters of tax liens can be overwhelming. Below, dive into the ins and outs of tax liens to alleviate some of that stress.

What Are Tax Liens?

Tax liens

 are a legal form of secured interest or payment — governed by the Fair Credit Reporting Act — that normally take the form of property or items equal to the amount owed on taxes.

In other words, if you owe the IRS more than you paid in taxes, a lien gives the IRS a claim against your physical property in order to make up that lost or missing revenue. Liens only become active after your tax bill has remained unpaid following a legal, written demand from the IRS.

How Does a Tax Lien Work?

For example: if you own a car worth $12,000 and you owe about $12,000 to the IRS in taxes, a tax lien may result in the IRS taking your car as a form of “payment” for the money owed.

According to the Internal Revenue Code (section 6321): LIEN FOR TAXES —

“If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belong to such person.”

The sole purpose of a tax lien is for the IRS to secure the payment of taxes that are owed. It can result from the failure to pay taxes (income or otherwise) and tax liens can expire after a certain number of years. This is known as “a lapse in time” and generally takes 10 years.

However, there are some circumstances in which the IRS may extend that period of time, or even excuse debts  (typically in the case of wrongful charges or when the debtor informs the IRS that they do not have any assets available due to bankruptcy or financial hardship).

How Does a Tax Lien Affect You?

For many people who have had tax liens in the past or who currently owe tax liens to the IRS, one of the biggest concerns is how this will affect their finances in the long term. Will tax liens be similar to having an account in collections? If the tax lien lapses, will it disappear from a credit report altogether?

As it turns out, tax liens have a very similar effect on your credit report as a bankruptcy. The credit bureaus will see a tax lien as a delinquent account and will treat it as such even following payment of the lien. Here are the ways a tax lien can affect you:

  1. Creditworthiness: Tax liens are no longer part of credit reports, but the IRS can still file an official notice of a tax lien that is accessed by lenders. This could negatively impact your ability to qualify for credit as well as what your conditions and rates look like;
  2. Selling or refinancing a home: If you are selling or refinancing a home, when you’re searching for the title it is common for tax liens to come forward. When this happens, you generally need to pay the taxes in order to close or refinance;
  3. Tax levy: When you miss a payment or refuse to pay, the IRS can issue a Notice of Intent to Levy (CP504 notice). If you do not pay or contact the IRS after receiving this form, the IRS may legally seize tax refunds that you are entitled to, as well as other properties if your balance is not taken care of;
  4. Time: When you are overdue on payments, the IRS sends you to automated collection systems (ACS). These systems are time consuming and can require you to spend a large amount of time on hold. You may also be assigned a revenue officer who requires in-person check-ins.

How to Get Rid of Federal Tax Liens

Because tax liens can be so devastating to your financial situation, it’s important to take care of them as soon as possible. Unfortunately, tax liens can be filed by the IRS within 10 days of sending you a written notice that you owe money for your taxes. That means you’ll have very little time to work out a repayment plan or settle the debt. The following are ways to get rid of federal tax liens:

  1. Pay your balance: The only guaranteed way to get rid of a tax lien is to pay back what you owe. This is the fastest route for taking care of your federal tax lien;
  2. Use IRS payment plans: If you are unable to pay off your federal tax lien in one lump sum, you can take advantage of a payment plan. The terms of the plan will depend on the agreement you come to with the IRS;
  3. File an appeal: If you feel that you disagree with the IRS’s federal tax lien, you can request an appeal. This process requires an attorney, a public accountant, and an understanding of collection appeal rights;
  4. File for bankruptcy: The last option for getting rid of federal tax liens is to file for bankruptcy. This should be a last-ditch effort and you should do your research beforehand in order to find out what filing for bankruptcy entails.

There is also the possibility that the lien can be either withdrawn or released. When a tax lien is withdrawn, it could be taken off your credit report immediately. The catch is that the lien has to be paid in full and you have to be sure you’ve complied with all tax filings within the past three years. Withdrawals can also happen if you have entered into a direct debit installment agreement with the IRS.

To have a lien withdrawn under a direct debit installment agreement, you must make three consecutive payments (to be able to apply), the total debt must be less than $25,000, and you must pay off the debt within 60 months (or before the lien expires, whichever is first). Additionally, any past or current debit installments must not have been defaulted on, as the IRS will take your history of past accounts into consideration.

A release simply means that the IRS acknowledges you have paid off the outstanding tax bill, and no longer reports the debt as delinquent. However, this is different from a withdrawal; with a release, the lien is still recorded on your credit history for up to 10 years. A release just shows that you fulfilled your obligation to pay and that the IRS no longer has an active claim against your property.

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