Tax Lien Guide: Understanding, Resolving, and Investing

A tax lien is a legal claim against your assets or property for unpaid taxes. Having a tax lien can negatively impact your personal finances, particularly your credit score.

When the IRS files a tax lien, it becomes public record and can remain on your credit report for up to seven years. This can make it difficult to obtain credit or loans. Luckily, you can resolve a tax lien by paying off your tax debt in full or negotiating with the IRS to establish a payment plan or offer in compromise. It is important to take action promptly when dealing with a tax lien to minimize its impact on your finances.

How Does a Tax Lien Work?

When you fail to pay your tax obligations to the federal, state, or local government, a tax lien gives the government the right to seize or sell your assets, including your personal property to satisfy the unpaid tax debt.

A tax lien isn't permanent, and can be removed when you pay your tax debt or reach a negotiation with the IRS.

So, how do you find out if a tax lien has been issued on your property?

1. The government will typically file a public notice, known as a Notice of Federal Tax Lien, with the county recorder's office or the Secretary of State. This informs other creditors and the public that the government has a claim on your property.
2. To determine if a tax lien has been placed on your assets, check with your local county recorder's office or conduct a title search on your property.
3. The IRS provides an online Federal Tax Lien search tool to help you verify if a federal tax lien has been filed against you.

It's essential to stay informed about your tax obligations and take action to resolve any outstanding debts to avoid facing a tax lien.

Consequences of Having a Tax Lien

A tax lien can negatively affect your finances and overall financial health. Some of the primary impacts of a tax lien include:

• Credit score: A tax lien can cause significant damage to your credit score. A lien can lead to a lower credit score, making it more challenging to secure future loans, credit cards, or other forms of credit.
• Mortgages and refinancing: If you have a tax lien on your property, it may be challenging to get a mortgage, refinance your existing mortgage, or qualify for other loans. If you do qualify for a loan, you may face higher interest rates compared to a borrower without a tax lien.
• Time-consuming negotiations: Dealing with a tax lien often involves negotiating with the IRS or other taxing authorities to resolve your tax debt, which can be a lengthy and complex process that may require professional assistance. Engaging with a credible tax relief company can help you understand your options, such as setting up a payment plan or reaching a compromise with the IRS.
• Risk of a tax levy: A tax lien is a precursor to a tax levy, which is the actual seizure of your property to satisfy the tax debt. If you fail to resolve the tax lien, the government may eventually resort to a tax levy, seizing and selling your assets, such as your home, car, or bank accounts, to recover the owed taxes.

Understanding the impact of a tax lien on your finances is crucial to take appropriate steps to resolve your tax issues and minimize the negative consequences associated with a tax lien.

Tax Lien vs. Levy

A tax lien and a tax levy are both methods the government uses to collect unpaid taxes, but they differ in their implications and effects on taxpayers:

• Tax Lien: A tax lien is a legal claim placed on your property, such as real estate, personal property, or financial assets, resulting from unpaid taxes. It serves as a public notice that you owe taxes and gives the government priority over other creditors. However, a tax lien doesn't result in the immediate seizure of your property.
• Tax Levy: A tax levy, on the other hand, is the actual confiscation and seizure of your property to satisfy your tax debt. This can include garnishing wages, taking money from bank accounts, or seizing and selling assets like real estate or vehicles. A tax levy occurs only after a tax lien has been in place, and the taxpayer has failed to resolve the tax debt.

Thankfully, the IRS provides multiple ways to help resolve a tax lien so that it does not turn into a tax levy.

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How to Get Rid of a Tax Lien

If you're facing a tax lien, several options are available to resolve the issue and potentially remove the lien from your record. Here are some common methods and their pros and cons.

1. Pay your taxes in full: The most straightforward way to get rid of a tax lien is to pay your outstanding tax debt in full. Once the debt is cleared, the IRS will release the lien within 30 days. However, this option might not be feasible for everyone, especially if the tax debt is substantial.
2. IRS payment plan: If you can't pay the full amount immediately, you can consider setting up a payment plan with the IRS. This allows you to pay your tax debt in installments over an agreed period. While this method helps you manage your debt, the lien will remain in place until the entire amount is paid, and you may accrue additional interest and penalties.
3. Offer in Compromise: An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS which allows you to settle your tax debt for less than the full amount owed. To qualify, you must demonstrate financial hardship and inability to pay the total amount. The downside is that the approval process can be lengthy, and not all offers are accepted.
4. Filing with the IRS Office of Appeals: If you believe that the tax lien was filed in error or disagree with the amount owed, you can file an appeal with the IRS Office of Appeals. However, this process can be time-consuming, and there's no guarantee that the appeal will be successful.
5. Bankruptcy: In some cases, filing for bankruptcy may help you deal with a tax lien. However, not all tax debts are dischargeable in bankruptcy, which may negatively affect your credit. This option should be considered a last resort only after consulting with a financial or legal professional.

Each method has its own benefits and drawbacks, so it's essential to carefully evaluate your financial situation and consult with a tax professional or financial advisor before deciding on the best course of action to resolve your tax lien.

Tax Lien Important Forms

When trying to get rid of a tax lien, you must be aware of the necessary forms to file with the IRS. Here are some key forms that may be relevant:

• IRS Form 14134 (Application for Certificate of Subordination): This form is used to request subordination of a federal tax lien. Subordination does not remove the tax lien, but allows other creditors to move ahead of the IRS in priority. This may make it easier for you to refinance your mortgage or secure other financing. To be eligible for subordination, you must demonstrate that it's in the government's best interest.
• IRS Form 12277 (Application for Withdrawal): If you want to request the removal of the public notice of a tax lien, you'll need to submit Form 12277. Withdrawal doesn't eliminate the tax lien itself but removes the public record, which may improve your credit score. To qualify for withdrawal, you must meet certain conditions, such as compliance with your current tax filings and an approved installment agreement.

To learn more about ways to resolve tax debt in order to avoid a tax lien, read our Guide to Tax Relief.

Other Alternatives to Getting Rid of a Tax Lien

Besides the methods mentioned earlier, there are other alternative ways to secure funding to pay back taxes when dealing with a tax lien. These options can help you resolve your tax debt and release the lien from your property or assets:

• Using home equity: If you have built up equity in your home, you may consider taking out a home equity loan or a home equity line of credit (HELOC) to pay off your tax debt. This option lets you leverage your home's value to obtain the necessary funds. However, weighing the risks and benefits is essential, as defaulting on a home equity loan could lead to foreclosure.
• Selling your house: If you have substantial equity in your property, selling your house and downsizing might be a viable option to raise funds to pay your tax debt. Keep in mind that selling your home may take time, and you'll need to consider factors such as real estate market conditions, potential capital gains tax, and the costs associated with selling a property.
• Borrowing from friends or family: In some cases, borrowing money from friends or family members can be a feasible option to settle your tax debt. This alternative may provide more flexible repayment terms, but discussing expectations and creating a written agreement is a wise decision to avoid misunderstandings.

Next Steps When Dealing with a Tax Lien

Dealing with a tax lien requires understanding the potential consequences and taking appropriate actions to resolve the issue. Here's what you can expect in two different scenarios:

1. Neglecting to pay off a tax lien: If you fail to address your tax lien, it can lead to more severe consequences. The IRS may take further collection actions, such as issuing a tax levy on your property, assets, wages, or bank accounts. A tax lien can also significantly damage your credit score, making it difficult to obtain loans, mortgages, or lines of credit. Additionally, the lien will remain in the public record, potentially impacting your ability to sell or refinance your property. It's crucial to take action and work towards resolving your tax debt to prevent these outcomes.
2. Successfully resolving a tax lien: If you manage to resolve your tax lien by paying off the debt in full or agreeing to an IRS-approved payment plan, the IRS will release the lien. Once the lien is released, the county records will be updated to reflect this change. Remember that although the lien is released, your credit report may still show the tax lien for up to seven years from the date of release. However, resolving the lien can demonstrate to potential creditors that you have taken responsibility for your tax obligations, potentially improving your ability to obtain credit in the future.

Avoiding Tax Lien Scams

Unfortunately, tax lien scams are becoming more common, and it's crucial to be vigilant to protect yourself. Scammers may pose as government agents or tax lien resolution companies, attempting to deceive you into paying them to resolve a fabricated tax lien. To avoid falling victim to such scams, always verify the legitimacy of a tax lien by contacting the IRS or your local tax authority directly.

Be cautious of unsolicited phone calls, emails, or letters demanding immediate payment, as genuine tax authorities will typically send multiple notices through the mail before taking any further action.

Conclusion

In conclusion, a tax lien is the government's legal claim on your property or assets when you fail to pay your taxes. Understanding how a tax lien works, its consequences, and the differences between a tax lien and a tax levy are essential to navigating this complex issue. Various resolution options are available, such as IRS payment plans, Offers in Compromise, filing with the IRS Office of Appeals, or bankruptcy. Familiarizing yourself with the relevant forms, exploring alternative ways to pay back taxes, and knowing the next steps if you have a tax lien will help you manage the situation effectively. Finally, be cautious of tax lien scams and ensure you verify any claim made against you.

For more information and resources, consider visiting the IRS website's page on understanding a federal tax lien. Also, consult with a tax professional or attorney specializing in tax liens to receive personalized advice tailored to your situation.

Article Topics

Taxes