What is an IRS Tax Lien? The IRS's Legal Claim to Your Property

A tax lien automatically arises when a taxpayer owes taxes to the IRS. The lien secures the IRS's right to the taxpayer's property and rights to property, and it creates the groundwork for the IRS to move forward with wage garnishments or asset seizures. To protect yourself, you should pay your taxes before the IRS issues a Notice of Federal Tax Lien -- to get hep now, use TaxCure to find an experienced tax pro in your area.

Key takeaways

• IRS tax lien - a legal claim to your property by the IRS if you owe back taxes.
• When created -- automatically arise anytime you owe back taxes.
• Notice of federal tax lien -- the public notice of the lien, filed by the IRS.
• How liens work -- liens attach to all of your assets and rights to property. They entitle the IRS to the proceeds if you sell the property.
• Removal -- there are several different ways to get liens off of specific pieces of property or to have the public record withdrawn.

What is an IRS Tax Lien?

A tax lien is the government’s legal claim to your property, including property you have the right to or obtain in the future, for the amount of the tax liability. It is also called a "statutory lien" or assessment lien." The IRS files tax liens to secure payment of taxes owed. In fact, the IRS creates secured debt when the tax lien is filed correctly.  When the IRS files a tax lien, it attaches to just about everything you own (automobiles, houses, investment accounts, and other assets). If you sell your property, the IRS has the right to take the proceeds of the sale to cover your tax, interest, and penalties.

The IRS’s Cincinnati campus hosts the Centralized Lien Operation. It is part of the IRS’s Small Business/Self-Employed Campus Compliance Services Operations (CCSO). It sends out Notices of Federal Tax Lien (NTFL) and Federal Estate Tax Lien. They process all lien notices and releases.  Moreover, they also assist IRS personnel in the field with processing withdrawals, refiles, and revocations.

What is a Notice of a Federal Tax Lien (NFTL)?

The NTFL is a document that can identify up to fifteen different tax liabilities assessed against you or your business. It also contains the last day the IRS can refile for each tax liability, which is usually ten years from the date the IRS assesses the liability plus 30 days. The Notice of a Federal Tax Lien (NTFL) is filed with specific state and local governments to alert the public. The federal tax lien notice is a public document that informs third parties about the existence of a federal tax lien.

A properly filed NFTL will identify the taxpayer, tax year, assessment, and release date [Treas. Reg. § 301.6323-1(d)(2)]. One notification can list up to 15 statutory individual tax liens. It is essential to understand that the Notice of Federal Tax Lien tells you your assessed balance but does not include charges for filing and releasing the lien.

Difference between NFTL and IRS tax lien

NFTLs and tax liens are often confused with each other, but they are not the same. An IRS tax lien is a statutory lien -- that means it is created by the law (statute). If you owe tax (due to filing a return and not paying or having tax assessed against you through an audit or a substitute for return), a lien is automatically created. The IRS has a legal right to your assets. However, there's no record of the lien until the IRS files the NFTL. To put it another way, the legal claim exists as soon as you owe tax, but the public record doesn't exist until the IRS files the NFTL.

When the IRS Files a Notice of Federal Tax Lien

Again, liens arise automatically when you owe tax. However, the IRS generally doesn't file a notice of federal tax lien unless you owe more than $10,000 and have failed to respond to the IRS’s first balance due letter. In rare cases, the IRS may file an NFTL on tax liabilities worth less than $10,000. The IRS may file an NFTL if the situation meets the following conditions:

• The IRS assessed you with a tax liability.
• The IRS sent a notice to demand payment.
• You did not pay the taxes owed in full within ten days after the IRS notified you of tax liability.

Once the IRS takes these three steps, the agency can file a Notice of Federal Tax Lien (NTFL) for the amount of taxes owed plus interest and penalties. The IRS doesn't have to notify you before filing the lien, but they must notify the taxpayer of every Notice of Federal Tax Lien filing via mail, in person, or by leaving the notice at the taxpayer's residence or office within 5 business days after the lien is filed.

How IRS Tax Liens Work

Once the IRS files the NTFL document with a local county recorder of deeds or the Secretary of State in your state, it applies to any assets you own now or in the future.  It notifies your creditors that the IRS has a legal claim to your current and future assets. You will not be able to sell assets unless you clear the lien -- generally, by paying a portion of the sale (up to the amount of the tax debt, including interest and penalties) to the IRS. If you transfer assets, the lien will stay attached to them -- for example, if you give a car to a relative, it will be hard for them to retitle the car in their name, but if they're able to do so, the lien will stay attached to it. The lien will also attach to any future assets that you get.

What if there is already a lien against your assets?

Then, the IRS's lien will take priority behind the existing lien. Typically, liens take priority based on the order they are issued. Here's an example. Imagine you own a home, you owe $200,000 to your mortgage company, and the IRS issues a tax lien for $60,000. Your mortgage holder's lien takes priority in front of the IRS's lien. Now, say that you sell the home for $400,000. Your mortgage lender will get $200,000, the IRS will get $60,000, and you will get any remaining amount. 

What if another entity issues a lien after the IRS?

Then, generally, the IRS's lien takes priority in front of the lien that was issued later. Here's an example. Say that you own your home free and clear with no mortgages. You get behind on your income tax payments, so the IRS issues a Notice of Federal Tax Lien for $30,000. Then, you don't pay your local property taxes, so your county issues a property tax lien for $4,000. The property tax lien was issued second so it falls in line behind the IRS. 

Adverse Effects of a Federal Tax Lien

A tax lien used to appear on your credit report with the major consumer credit reporting agencies. That lowered your credit score and made it extremely difficult to borrow money. Now, liens don't appear on credit reports, but lenders, title companies, and other entities can still find them, as they are public records. There are lien search tools designed to help with this process. Additionally, if you go to title something, it moves through the same government agencies/departments that have a record of the federal tax lien.

Often, a tax lien is a precursor to a tax levy. A levy is when the IRS takes your assets. Look at the differences between liens and levies. Or contact a tax pro for help before the IRS tries to levy your assets.

Property Subject to Tax Liens

A federal tax lien attaches to all property owned by the taxpayer as well as all property rights. That includes tangible as well as intangible property. It also consists of all future purchases and gifts you receive after the IRS files the lien. Here are some common types of assets affected by tax liens:

• Houses or other property
• Motor vehicles
• Bank accounts
• Wages and benefits
• Accounts receivable (bills due to your company)
• Rental income
• Securities such as stocks and bonds

There are no exceptions -- federal tax liens attach to all of the taxpayer's property. However, if the IRS decides to move forward with a tax levy, certain assets are exempt from seizure -- for example, if the IRS garnishes your wages, a small portion is exempt from garnishment.

How to Appeal a Federal Tax Lien

When you receive the notice that the lien has been filed, you have the right to appeal with a Collection Due Process hearing. At this point, you can generally only get the lien released (removed) if it has been issued in error. However, you can use the CDP hearing to talk about payment options. In particular, you may be able to set up a direct deposit installment agreement for up to 60 months, and the terms of your agreement may state that the lien will be withdrawn (removed from the public record) if you owe under a certain threshold (generally, under $25,000) and make three satisfactory monthly payments. If relevant, you can also talk about other resolution options for your tax debt during the hearing -- for example, offer in compromise or innocent spouse relief. 

Getting a Tax Lien Removed

The IRS will release the tax lien if:

• You pay your taxes in full,
• The statute of limitations on collection expires,
• You successfully appeal the lien,
• A bond guarantees payment, or
• You settle your tax liability with an Offer in Compromise and meet all of the conditions of the offer.

A release means that the lien no longer exists anymore. The IRS no longer has a legal claim to your property. However, it is not the only way to deal with the lien. Depending on the situation, you may also need to explore the following. Check out the links for more details:

• Withdrawal -- The IRS removes the public record of the lien, but the lien still continues to exist. Generally, this can happen if you owe under $50,000, set up monthly payments to come automatically out of your bank account (aka direct debit installment agreement), and you make three payments on time. Apply using Form 12277.
• Subordination -- The IRS agrees to let its tax lien take priority behind other creditors. This can help in a variety of situations, but the most common tends to be when you want to borrow money against an asset and use the funds to pay off your tax debt. That's generally not possible, unless the IRS subordinates its claim to the lender.
• Discharge -- The IRS removes the lien from a specific piece of property. Generally, the IRS agrees to do this if you're selling the property to get cash to pay off your tax debt. Typically, the  IRS will only discharge the lien if the property is worth less than the amount of the lien.

The purpose of the tax lien is to convince you to pay your taxes owed. Luckily, the IRS has various payment plans, settlement options, and penalty relief programs that make it easier to pay off your taxes.

FAQs About Federal Tax Liens

Here are some of the most common questions you may have about IRS tax liens. To get answers to your specific questions, reach out to a tax pro today.

Does the IRS have to issue an NFTL before seizing assets?

Not necessarily. The tax lien exists by statute as soon as you owe a tax debt, and the IRS can move forward with a levy (asset seizure, wage garnishment, etc) without first filing an NFTL. However, the IRS must give you advance warning before seizing your assets, unless the collection of the tax is in jeopardy.

Do tax liens show up on your credit report?

The IRS does not directly notify credit bureaus about tax liens, nor do they show up on credit reports anymore. However, once an NTFL is filed, the taxpayer's liabilities become public record, and different tools used by lenders will find them. The IRS filing of a Notice of Federal Tax Lien is meant to notify creditors that the government has a legal right to the taxpayer's property. 

What happens if you sell property with a lien attached?

If you sell your home or any other property while the lien is attached, the IRS will have the right to the proceeds of the sale. As long as the IRS has filed a Notice of Federal Tax Lien, there will be a record of a lien attached to the title. For the title to transfer, the lien must be cleared, and generally, that happens by the title company (or whoever facilitates the sale) keeping some of the proceeds of the sale and sending it to the IRS so that they can release the lien. 

What if you inherit or receive assets when you have a tax lien?

The tax lien also attaches to your future assets. So, if someone gives you a gift or if you inherit assets, the tax lien automatically attaches to those assets. For example, say that someone gives you a car, and there is a notice of federal tax lien in your name. When you go to register the car in your name with the county, they will not issue you a free and clear title. Instead, you will have a title that shows the IRS as a lienholder. 

What if I file for bankruptcy?

Generally, tax liens survive bankruptcy. There are only certain types of taxes that can be discharged in bankruptcy, and even if you get the tax discharged, the lien may continue to exist.

When will the IRS release the lien after I pay in full?

Typically, it takes about 30 days to get the NFTL withdrawn after you pay in full. However, if you need confirmation that the lien has been satisfied before that, then you can request a letter from the IRS. To speed up the process, consider paying in verified funds such as a cashier's check.

Help With a Tax Lien

Depending on your situation and what you are trying to accomplish financially, there are many options available. If the lien is having adverse financial effects, then it is a good idea to talk to a tax professional who has experience with tax liens. Tax professionals can appeal, subordinate, discharge, or release tax liens if you meet the proper qualifications. A tax professional can also point you in the best avenue to pursue based upon your situation.