When a person or company fails to pay taxes that are owed to the government, the government may file a tax lien, which is a legal claim against the assets of the individual or company. In general, a lien's purpose is to assure that an obligation, such as a loan or, in this instance, taxes, would be paid in full. The creditor may use their right to continue with the asset seizure if the obligation is not completed.

Understanding a Tax Lien

If the property owner is behind on their income taxes, either the federal or state government can impose a tax lien on the property. If property or income taxes are not paid when they are due, local governments can impose a lien on the owner's property. The existence of the lien does not indicate that the property will be put up for sale. Instead, it assures that the tax authorities have the first claim on the creditor's assets, ahead of any other creditors competing for those assets. Do you know what is a state tax lien?

The Process of a Tax Lien

When a letter outlining the amount of back taxes is sent to a taxpayer, it marks the beginning of the procedure. A notice and demand for payment is the name given to this document. The Internal Revenue Service (IRS) has the authority to file a lien on a taxpayer's property if the taxpayer does not pay the tax bill or make an effort to settle the matter with the agency.

This lien is attached to taxpayers' assets, including their property, automobiles, and any securities they may own. The lien includes the taxpayer's newly acquired assets while still active. Additionally, it attaches itself to any property owned by the firm and the accounts receivable for the company.

Even after the bankruptcy is discharged, the tax lien and the tax obligation may still need to be paid if the person decides to file for bankruptcy. In filing for bankruptcy, most obligations are discharged, but not the sum owed to the federal tax.

What the IRS Can Do

If a taxpayer owes back taxes to the federal tax and has not made any attempt to pay what is owed, the Internal Revenue Service (IRS) in the United States has the authority to put a lien on the person's house, car, and bank accounts. A federal tax lien prioritizes claims made by any other creditors. In addition, it makes it more difficult for the taxpayer to acquire loans or sell their assets. The only way to remove a federal tax lien is to either completely pay the amount of tax owed or agree with the Internal Revenue Service.

It used to be the case that once a lien was filed, it would appear on the taxpayer's credit record, which would lower that person's credit score. In addition, the taxpayer may be prevented from selling or refinancing any assets that have liens connected to them as a result. It is important to know that the three main credit reporting agencies have not included tax liens on consumers' credit reports since 2018. The lien will continue to be in effect either until the outstanding tax bill is paid in full or until the applicable statute of limitations on the debt has passed. If a taxpayer disregards a tax lien, the Internal Revenue Service (IRS) can confiscate the person's assets.

Getting out of a Tax Lien

Paying the back taxes is the quickest and easiest method to get out from under a federal tax lien. On the other hand, if this cannot be accomplished, there are various methods to deal with a lien with the assistance of the IRS.

• If the taxpayer agrees to a payment plan with an automated withdrawal each month until the amount is cleared, the IRS will consider removing a tax lien placed on their property.
• The taxpayer may be able to discharge a particular property, which would essentially remove it from the lien. Certain taxpayers and assets do not qualify for the discharge. Publication 783 of the Internal Revenue Service contains the rules that pertain to discharging property.
• Although subordination does not in and of itself erase a lien from any property, it might make it simpler for a taxpayer to acquire another mortgage or loan. To apply this action, you must utilize IRS Form 14134.
• The public notice of a federal tax lien may be removed via yet another step known as the withdrawal of the notice. Even though the taxpayer is still responsible for the debt, the Internal Revenue Service (IRS) is exempt from competing with other creditors for the debtor's property if withdrawal is chosen. The application is included in Form 12277.