The Basics: Tax Liens & How They Can Affect You

If you happen to owe back taxes to the Internal Revenue Service (IRS), there are at least two things you’ll definitely want to avoid: tax liens and tax levies. A federal tax lien is no joke and can have a severe impact on your life in many ways. In the below sections, we will discuss how you can be affected by a tax lien, how they work, some tips for avoiding one, as well as getting yourself out. 

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What is a tax lien?

A federal tax lien is a legal claim against the property or assets of a person or business who fails to pay taxes owed to the IRS. When you fail to resolve a federal tax lien, a tax levy is the next consequence. A tax levy is the act of your property being acquired by the government as a means to pay back the taxes you owe. Tax levies can also include but are not limited to:

  • Garnishing of wages.
  • Real estate.
  • Vehicles. 
  • The seizing of assets such as vehicles, real estate, businesses you own, and bank accounts. 

How tax liens work

If you receive a tax bill from the IRS and either fail or refuse to pay it, the government can place a tax lien on your property or assets. Rather than forcing you to sell your property in an effort to pay back your taxes, a federal tax lien secures the IRS’s right to the proceeds in order to pay for the taxes when you do sell. Here is how it usually plays out:

  • The IRS bills you for taxes in which you are required to pay, but you fail to do so.
  • The IRS will then send you a Letter 3172, Notice of Federal Tax Lien Filing and Your Rights to a Hearing Under IRS 6320.
  • You will have 30 days to request an appeal (the instructions for requesting an appeal will be enclosed)
  • If you fail to request an appeal within the allotted 30-day period, you can file a request on Form 12153 for an Equivalent Hearing, but keep in mind that an Equivalent Hearing will not:
  • Block a tax levy.

  • Place a suspension on the 10-year period the IRS has to collect your debt.

  • Allow you to go to court for the purpose of appealing any decisions made by the IRS Office of Appeals. 

How a federal tax lien affects you

If you end up on the hook for unpaid taxes, and the IRS slaps you with a federal tax lien, there are the consequences that can unfold as a result:

  • Your creditworthiness could be harmed: Although tax liens no longer appear on credit reports, the IRS still harnesses the ability to file a public notice of a tax lien. In other words, they are allowed to inform creditors that the government has a right to your property. As a result, this can hurt your chances of getting a loan.
  • It could threaten your ability of being able to sell your home or refinance: Federal tax liens usually come about during title searches. Whatever equity you have in a house that you have up for sale will most likely have to go toward paying back your taxes in order to close. The same is also true when it comes to refinancing a home. 
  • It can be time consuming: If you end up with a tax lien from the federal government, you surely won’t be the only one. This means that the IRS is always busy processing a multitude of cases. You could spend several hours waiting to speak to a representative from the automated collection system (ACS). In some cases, taxpayers are assigned to a designated revenue officer, meaning that you may have to fit some in-person meetings into your schedule. 
  • You can end up with a tax levy: The final straw after not paying back your taxes comes in the form of a tax levy. If this happens, the IRS will issue a Notice of Intent to Levy. 

How to prevent a tax lien

If you want to avoid getting a tax lien placed on your property, you will need to pay your tax bill in full before a lien is filed by the IRS. Another way you can stop a lien from happening is by agreeing on an installment plan with the IRS fulfilling certain requirements. There are two different types of installment agreements that a taxpayer can obtain with the IRS:

  • A guaranteed installment agreement: For this type of installment agreement, you must owe no more than $10,000 in taxes.

  • A streamlined installment agreement: For this type of installment agreement, you must owe no less than $25,000 in taxes. 

Prevention through the course of an installment agreement is still possible if you owe more than $25,000, but you would have to pay down the balance until it equals $25,000. At this point, you would be eligible to enter a streamlined installment agreement. 

How to get rid of a tax lien

If you have failed to pay your tax bill, and then failed to prevent a tax lien or a tax levy, here are some ways that you can get rid of either/or:

  • Pay the tax bill: It might sound like the obvious solution to the problem, but most of the time paying back what you owe is the only way to get rid of a tax lien or tax levy. Try to be as cooperative as possible with the collection action. Don’t avoid them if they reach out to you and keep the communication honest and open.
  • Get on an IRS payment plan: No matter what, your outstanding balance is going to accrue interest and penalties until it’s paid off. However, if you enable the IRS to collect a minimum of three back-to-back payments directly from your back account—a direct debit installment agreement—the IRS could decide to remove the federal tax lien from public records. If you’re interested in an IRS payment plan, you can apply directly on the IRS website. 
  • Request an Offer in Compromise: You can request to settle your back taxes for an amount less that what you owe. Keep in mind that there are a lot of strings attached to this option and the IRS, on average, accepts less than half of the applications it receives per year. Here are just a few of the requirements to even be considered for an Offer in Compromise: 
  • File an Appeal: Just like with most other legal matters, the option to appeal also exists. You have the ability to ask the IRS Office of Appeals for a collection due process hearing if you would like them to review a lien or levy notice. Should you be opposed to an IRS representative’s decision regarding a lien or levy, you may request a meeting with the representative’s manager and subsequently ask the Office of Appeals to evaluate your case. 

Bankruptcy: It doesn’t have a nice ring to it, but desperate times call for desperate measures. Sometimes, bankruptcy can get rid of your tax debt. Keep in mind that this should be a last resort option, and it doesn’t always work.