When the IRS contacts you about taxes due, and you do not respond in a timely manner, they can issue a federal tax lien on your property. This is a serious event that can impact you in many ways– but keep in mind that you have options for resolving your issues with the IRS.
7 Consequences of a Federal Tax Lien
- May Affect Your Credit Score
- Assets Can be Seized
- Impacts Applications for Financing
- IRS has First Right on Property Sales
- Attaches to Business Property
- Shows in Public Records
- Lien Continues Through Bankruptcy
The Internal Revenue Service (IRS) can place a tax lien on your assets if you owe them money on taxes. This may occur after an income tax return has been processed or the federal IRS has processed a substitute for return (SFR). It may also happen after submitting an amended return or an audit.
A federal tax lien is a public notice that you owe money to the IRS and that they are claiming an interest in your property and assets. The lien is usually filed with the county government where the taxpayer lives. Generally, the IRS will give you a window of time to pay the bill after a notice and demand for payment, along with a chance to dispute the lien before it is applied. Those who neglect or refuse to pay and miss the timeframe will see a lien applied, and eventually the IRS will levy or seize their assets to pay the due amount. Be sure to read our article about tax levies to learn more.
If you owe money to the IRS, you must take action as soon as possible! The IRS applies heavy penalties and fees to late tax payments including daily compounding. The longer you wait, the more expensive it becomes to resolve. If you are issued a federal tax lien, prepare for the following consequences:
1. It May Affect your Credit Score
A federal tax lien is a matter of public record, and the credit bureaus that calculate your credit score may take that information into account on their records. In the past, this resulted in a negative impact to your credit score that could vary in severity. A federal tax lien would have stayed on a taxpayer’s credit report for 15 years if unpaid, or up to seven years after being paid. Once you obtained a federal tax lien release, you could then ask the reporting agencies to adjust your credit records.
Recently, however, the three credit reporting companies may no longer include tax lien penalties when calculating credit scores. This was due to policy changes affecting the type of information collected for a lien, and the relative difficulty required to accurately collect and sort this information from various sources.
2. Assets Can be Seized
A tax lien is a precursor to the IRS taking action to collect on a tax debt. A tax levy occurs when the IRS seizes assets to pay the tax debt. The IRS has enhanced power to collect debt compared to other creditors and can levy a wide range of assets. This can include vehicles and residences. However, the IRS generally will not take your primary residence or vehicle needed to get to work or school. Other assets that can be seized include retirement and savings accounts, life insurance policies, and government benefits. Your bank account can also be frozen for a period of time (such as 21 days) before it is seized.
The IRS can also garnish your wages directly from your paycheck. The IRS does not need a court order to do this and can take a higher percentage compared to other collectors who might be in line. Quitting your job to avoid wage garnishment will not work either since they can also garnish Social Security benefits, unemployment, welfare or other public assistance– even worker’s compensation. The IRS can also claim any future tax return and other assets.
3. Impacts Applications for Financing
Another downside to having a federal tax lien on public record is the impact on your financing options. Many lenders may be apprehensive of giving money to someone with a tax lien. This is in part due to the fact that the IRS gets first claim on assets. If you were to default on the lender’s loan, the bank may not be able to recover their money even if it was secured against your assets. You would have a hard time obtaining anything on credit, such as houses, cars, business loans, and even loans for the purpose of paying down your tax debt. However, the IRS may be willing to negotiate with you and there are a few options to obtain special financing.
4. IRS has First Right on Property Sales
A federal lien on your property and assets means that the IRS is claiming you owe them money. Until that lien is removed, you will have a much harder time selling property. Any property you sell can be seized by the IRS to pay the debt owed since the IRS tax lien takes priority over other liens. This lien subordination can make it much harder to manage your assets effectively as you work with the IRS.
In some cases, the IRS can issue a jeopardy levy in order to seize assets immediately and without notice. This is only done in cases where the taxpayer might be a flight risk or when they try to move their assets out of government reach. There are ways to dispute a jeopardy levy, and there may be a way to have the lien discharged in order to sell property. Generally, the IRS will seek court approval to seize assets and can even obtain court orders to enter your residence to seize assets. If you act fast, you may be able to recover some of your property that has already been sold by the IRS to settle your tax debt. Reach out to an attorney at Acadia Law Group today for professional legal help.
5. Attaches to Business Property
Businesses that fail to pay income, property, or estimated taxes may also find they are subject to a public Notice of Federal Tax Lien (NFTL). This lien attaches to all of the business’s property and greatly impacts the company’s assets. This includes a lien on equipment and inventory, as well as patents and other intellectual property. For some companies, such as those structured as sole proprietors or partnerships, the IRS may be able to hold the owners personally liable for business taxes. The idea is not to impede your ability to do business, but to secure those assets in case you cannot or will not pay back the government what it believes is due. Again, these tax liens are public record and will show up in an IRS federal tax lien search.
6. Shows in Public Records
By the time a taxpayer receives a Notice of Federal Tax Lien, the tax lien has already been made public and filed with the appropriate county office. Once this is done, it will show in your public records that you owe the IRS money. The notice will also detail what you owe the money for, the dollar amount due, and when it was applied. Anyone can look to see that you owe money to the government including credit bureaus.
It’s important to note that the Notice of Federal Tax Lien may not show the correct amount due if you’ve already made payments, had prior levies, or qualified for a tax refund. It’s even possible that the entire lien may not be valid if the entire amount has already been paid.
The IRS may place a lien the moment it determines an amount is due and delivers a Notice and Demand for Payment to the taxpayer. Be aware that public records are accessible online as well as at the county offices.
7. Lien Continues Through Bankruptcy
Underpaying on taxes such as incorrectly calculating estimated taxes can result in hefty penalties. Another consequence of a federal IRS tax lien is that it may persist even after a bankruptcy, in some cases. Bankruptcy proceedings may help eliminate other debts while protecting some assets from creditors, but it may not protect your assets from the IRS. There are situations where bankruptcy may help, but there are consequences to filing for bankruptcy. In these cases, it would be best to discuss your unique situation with an experienced tax lawyer. The Acadia Law Group is standing by to help.
How to Get a Tax Lien Removed
There are many ways an attorney can help you achieve tax debt relief. Tax lawyers understand and have experience dealing with the IRS, Internal Revenue Code (IRC) and other applicable laws. These attorneys know the processes involving federal tax liens and the associated timeframes for you to take action. This includes filing appeals and negotiating payment arrangements. Acadia Law Group can help you every step of the way.
A federal tax lien does have a statute of limitations and can last for 10 years. However, this date can be extended when you take certain actions or pursue different options. A lawyer can help you understand and determine the best course of action. This can include asking for a discharge of property; the IRS will remove a lien from certain assets usually in response to reaching an agreement. In some cases, the IRS may agree to subordination or allowing another creditor to have priority on an asset.
You might also agree to a payment plan with the IRS under the Fresh Start Initiative. Two options to consider are an installment agreement and an Offer in Compromise. If you can prove that you can’t pay the amount owed, the IRS may consider taking a lower amount to satisfy the debt. Once an arrangement is made, you have more options, such as asking for a withdrawal or removal of the lien from assets and public record. Once the underlying tax debt is paid or can no longer be collected, the IRS will issue a certificate of release of the federal tax lien. You may then take this to your county office to have the lien removed from public records.
Do You Owe the IRS in Unpaid Taxes?
There are many consequences to receiving a federal tax lien from the IRS. These include a potential drop in your credit score, the seizure of assets, trouble obtaining credit, as well as impacting your business assets. Federal tax lien priority supersedes the liens of other creditors, which can limit your options. A tax lien filing can impact your public record, and apply to your assets and real estate until you pay your tax and obtain a lien release. IRS tax liens are also listed in a federal tax lien database which is easily found online through a federal tax lien search in some counties.
Once you receive a tax lien notice, the lien has already been filed with a county office. If you do not respond or pay the due amount, the IRS may levy your assets, seize property, or garnish your wages. This could result in losing property, stocks, or retirement and savings accounts to pay the debt. It is important to understand that once you receive a notice and demand to satisfy a tax debt, the Internal Revenue Service wants to get paid and may be willing to make an agreement or payment plan. There is also the possibility that the amount on the tax lien is not correct for various reasons.
Remember, you do have options, and if you cannot pay the entire tax debt you may qualify for an Offer in Compromise or other payment arrangements. A taxpayer with the right information and advice from a legal tax professional can mitigate or even avoid the most serious of these consequences. A payment plan can help to obtain a withdrawal. Federal tax lien expiration can take 10 or more years until it is removed. A tax attorney can help you take the appropriate steps to quickly manage a demand for payment and help negotiate for a return of seized property. For more information, or for help with tax debt relief, reach out to Acadia Law Group today.