What is an IRS Tax Lien? How and Why the IRS Files Them

What is an IRS Tax Lien?

A tax lien is the government’s legal claim to your property including property you obtain or have rights to 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. When the IRS files a tax lien it attaches to just about everything you own (automobile, house, and other assets). If you sell your property, the IRS has the right to take the proceeds of the sale to cover your taxes, 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 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. One notification can list up to 15 statutory individual tax liens. An NTFL, on the other hand, differs from a statutory lien in terms of legality.

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. 

When the IRS Imposes Tax Liens

If you owe more than $10,000 and you have failed to respond to the IRS’s first balance due letter, the IRS usually issues a tax lien. In rare cases, the IRS may file a tax lien on tax liabilities worth less than $10,000.

How the IRS Tax Lien Process Works

The IRS files a tax lien 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.

Once the IRS files the NTFL document with a local county recorder of deeds or the Secretary of 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.

The NTFL is a document that can identify up to fifteen different tax liabilities assessed against you or your business.  It 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 IRS 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.

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 make it extremely difficult to borrow money. However, with the major credit bureaus removing tax liens from credit reports, some lenders leverage other solutions like LexisNexis’s Liens & Judgements report.

To explain, imagine you want to borrow money to buy a home. When you take out a mortgage, the bank has your home as collateral. Therefore,  if you cannot pay your mortgage, the bank can take the property.  It makes it risky for the bank to lend you money if you have a tax lien because property acquired after the fact will provide the IRS priority. As a result, lenders usually turn down loan applications when you have a tax lien. This doesn’t just apply to mortgages. Federal tax liens can make it extremely difficult to get car loans, take out new credit cards, or rent a home or apartment.

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
• Accounts receivable (bills due to your company)
• Rental income
• Securities such as stocks and bonds

Getting a Tax Lien Removed

Tax liens stay in place until you pay your taxes in full, the statute of limitations on collection expires, the lien is successfully appealed, a bond guarantees payment or you fulfilled payments terms with an Offer in Compromise the IRS accepted. The IRS can also withdraw a tax lien if you make three successful payments on a direct debit installment agreement. However, a withdrawal is not the same thing as a tax lien release. If the IRS doesn’t withdraw your tax lien automatically, you need to contact the agency directly to request a withdrawal.

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.

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.

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 that 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.