How to Handle a Federal Tax Lien

A federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets.

A Federal tax lien is not a piece of paper, it is a legal claim to a taxpayer’s property. It arises by operation of law when Federal tax is assessed against the taxpayer’s property, and remains unpaid after demand for payment by the United States. A Federal tax lien attaches all property and interests in property owned by the taxpayer at the time it arises, or acquired by the taxpayer during the ensuing ten years.

A Federal tax lien is a “secret” lien, known only to the Internal Revenue Service and the taxpayer. The Internal Revenue Service it is forbidden by law from saying anything about the lien to any person other than the taxpayer, with two exceptions. First, it can bring a judicial proceeding to foreclose the Federal tax lien.

Second, unless the balance is de minimis, the Internal Revenue Service issues a notice of Federal tax lien (“NFTL”) against the taxpayer, and records it in the register of deeds’ office in the county of the taxpayer’s residence. The Internal Revenue Service records NFTLs as a matter of practice, to prevent third parties who purchase property from the taxpayer, or lend money to the taxpayer taking a security interest in the taxpayer’s property, from acquiring an interest in the taxpayer’s property superior to the Federal tax lien.

The three major credit reporting agencies include NFTLs in the taxpayers’ credit reports, affecting the taxpayer’s credit standing. Employers are increasingly checking candidates’ credit before hiring them. A recorded NFTL can affect the taxpayer’s employability in certain industries, such as financial services, or tax administration.

Despite claims commonly made in advertisements for taxresolution services, a tax lien is not something you can just make go away. It continues in existence until the tax is paid in full or becomes uncollectible by the passage of time.

But a taxpayer is not without weapons in dealing with a tax lien. First and foremost, the taxpayer should make sure that the tax lien is in the correct amount. If the assessment is adjusted, the tax lien will adjust with it. The taxpayer’s representative should pull the taxpayer’s account transcripts from the Internal Revenue Service. An account transcript reveals whether the tax was assessed on a tax return or a substitute for return. A tax return is prepared by or for the taxpayer, and presumably takes advantage of all available exemptions, deductions, and credits. A substitute for return is prepared by the Internal Revenue Service, which does not know of deductions that may be available to the taxpayer, and resolves all doubts against the taxpayer. A substitute for return does not start the statute of limitations on assessment or collection running. If account transcripts reveal that substitute for returns have been filed for the taxpayer, the taxpayer should have actual returns prepared and filed as soon as possible. Once the actual returns are filed and processed, the Internal Revenue Service will adjust the assessments to the actual amounts per the actual returns.

How a Lien Affects You

Assets — A lien attaches to all of your assets (such as property, securities, vehicles) and to future assets acquired during the duration of the lien.

Credit — Once the IRS files a Notice of Federal Tax Lien, it may limit your ability to get credit.

Business — The lien attaches to all business property and to all rights to business property, including accounts receivable.

Bankruptcy — If you file for bankruptcy, your tax debt, lien, and Notice of Federal Tax Lien may continue after the bankruptcy.

Avoid a Lien

You can avoid a federal tax lien by simply filing and paying all your taxes in full and on time. If you can’t file or pay on time, don’t ignore the letters or correspondence you get from the IRS. If you can’t pay the full amount you owe, payment options are available to help you settle your tax debt over time.

Lien vs. Levy

A lien is not a levy. A lien secures the government’s interest in your property when you don’t pay your tax debt. A levy actually takes the property to pay the tax debt. If you don’t pay or make arrangements to settle your tax debt, the IRS can levy, seize and sell any type of real or personal property that you own or have an interest in.