Tax Lien and Tax Levies: What They Are, and What to Do About Them

When you owe back taxes, the IRS has the mandate to pursue several actions against you. These begin very simply and graduate to harsher actions if you fail to comply. 

At the start, the IRS will send notices. These will go from pretty mildly-worded notices, but the language gets stronger with every ignored notice. Finally, the IRS sends you a final notice notifying you of its intention to issue a tax lien against you. You can also get a Notice of Tax Lien. 

When you get either of these, be warned that your taxes problems just got a lot more serious. You would be well-advised to speak to a tax attorney at this point.

What is a tax lien? What about a tax levy? And what should you do about them? Read all about that here. 

What Is a Tax Lien?

Let’s kick things off with the tax lien or Notice of Federal Tax Lien. 

When you owe back taxes, you should make the payment. Similarly, depending on your circumstances, you might be eligible for several IRS programs, including payment plans. 

So, you can either pay the back taxes and accruing penalties and interest or reach out to the IRS for a payment plan. 

When neither action is forthcoming from your end, the IRS can send you a notice of intent to issue a tax lien. 

A tax lien is a legal claim to your assets to secure payment of your tax debt. 

When the IRS files a legal Notice of Federal Tax Lien, the lien is attached to all your property.

Once it’s in effect, the IRS has legal rights over your property. Should you try and sell any of your assets, the IRS has the right to take the proceeds of the sale or part of it. The money goes into settling your tax debt alongside the accruing interests and penalties. 

If that’s not bad enough, a lien also attaches itself to properties you acquire in the future as long as the lien is in place. 

Think of this much like your mortgage. Your lender has a lien on your home. That means they can repossess the home if you fail to make your payments as agreed. 

Similarly, if you decide to sell your home with an outstanding mortgage, the proceeds go to the lender to service the mortgage first. You only get some money if the mortgage is satisfied and some cash is left over. A Federal Tax Lien works in much the same way. 

Which Assets Are Affected By A Federal Tax Lien?

As extensive and detailed as the tax code is, it is not very specific on which assets tax liens can be attached to. Unfortunately, this vagueness makes it possible for the IRS to attach any asset of value. 

However, some of the common items attached are:

• Homes (rental properties, vacation homes, and residences)
• Future homes purchased while the lien is in effect
• Vehicles, motorcycles, trucks, boats, and all other modes of transport
• Investment income, including annuities and rental income
• Jewelry and other valuable personal items
• Accounts receivable, for example, business revenues coming in 
• Bonds, stocks, mutual funds, and other securities

Aside from future interests, the IRS can also place liens on contingent interests and executory contracts. 

Contingent interests mean the IRS can lay claim on property or property rights to be received by the taxpayer if certain circumstances or events come into play. This often applies to living trusts. 

On the other hand, executory contracts mean that contract rights under a partially executed contract are considered a full right to a property owing to the realizable benefit attached. 

Also, the IRS can place liens on joint property, but only to the portion owed by the defaulted taxpayer. Unfortunately, even though the other party (s) in joint ownership aren’t in default, tax liens on joint properties hinder what can be done with the property overall. With a jointly owned rental property, for example, selling it or taking out credit on it can be impossible for the other party without outstanding taxes. 

Can You Sell A House With a Tax Lien?

When selling a home, part of the due diligence conducted by the prospective buyer is running a title search/ when your house has a tax lien, this shows up in the search. 

While this doesn’t necessarily mean that you can’t sell, it means the IRS has a right to the proceeds. If you don’t have an existing mortgage, the IRS takes priority on the proceeds. 

If you have a mortgage, your mortgage financier takes first place, and whatever is left goes to the IRS. You could still owe the IRS after the sale if what is left does not cover your tax bill plus all accruing charges. After your mortgage and tax bills are fully settled, you keep whatever is left. 

How Long Do Tax Liens Last?

The statute of limitations on the IRS collecting a tax bill is ten years. A tax lien lasts just as long. If a lien is placed immediately your account becomes delinquent, it remains in place for ten years. 

State Tax Liens

A state tax lien, also known as a state warrant, works much like an IRS lien. 

Every state has its own rules regarding outstanding amounts and when they file tax liens. The duration of tax liens differs as well. While an IRS tax lien expires after ten years, some state liens remain in place for up to 20 years. 

States are also mandated to determine how liens can be released, discharged, removed, or subordinated. 

The Tax Lien Filing Process

The IRS ordinarily issues tax liens for back taxes above $10,000, though exceptions exist. 

However, IRS operations are clearly outlined in the tax code, and these protocols must be followed. 

Before the IRS issues a tax lien, it must fulfill the following:

• Assess what you owe. Typically, this is done through tax returns. In the absence of returns, the IRS can file substitute returns or assess taxes via an audit. Keep in mind that IRS substitute taxes can be higher than if you filed yourself. 
• Send you a demand letter and allow you ten days to make arrangements. 
• The taxpayer must fail to settle their tax liability. They must also not take any initiative to reach out to the IRS for resolution. 

Once the above are in place, the IRS can make other arrangements to handle the tax debt. These include filing the tax lien with the local county recorder of deeds or the Secretary of State. 

What Are The Effects Of A Federal Tax Lien?

A tax lien affects you in several ways. These include the following. 

Credit Rating

Traditionally, tax liens appeared on your credit report. This would lower your score and make it impossible for you to access credit. 

In 2018, all three credit reporting bureaus decided to omit tax liens from credit reports. Since then, tax liens don’t have the direct impact they had on your credit rating. However, lenders can still search public records to determine if you have a tax lien. 

Naturally, having one makes you a risky borrower, making it harder for lenders to extend you credit.

Your damaged credit rating can also lock you out of jobs where your financial standing is considered. 

Liabilities

The IRS can place a lien against a car or home that’s on loan. However, the lender takes precedence over the disposal of the asset, and the IRS takes second place. 

However, with unsecured liabilities like credit cards, the IRS takes first place. What does this mean? Assuming you have filed for bankruptcy and have to sell your assets to settle your liabilities. From the proceeds, secured lenders (mortgage lenders, car loan financier) would be paid first. The IRS would take what its owed after secured lenders have had their say. Then unsecured lenders like credit card lenders would take what’s left. 

For unsecured lenders, this is, of course, bad for business. So once they know you have a tax lien, lenders might increase your interest rate. Because you are now viewed as a risky lender, they might also reduce your limit on credit cards and other lines of credit. 

Third Parties

A tax lien on joint property affects your other partner(s) negatively. For example, they can only sell or take a loan on the property once the lien is released. 

How to Handle a Tax Lien

There are several ways to remove a lien from one or more of your assets.

Some of these include:

• Paying off your tax liability in full
• Set up a payment plan with a  direct debit
• Prove the lien is hindering your ability to settle your lien
• Request for a discharge from a specific property (fill in Form 14135)
• Ask for lien subordination

When your lien is released, you can ask for a withdrawal if:

• You have settled your liability in full
• You have filed all returns for the last three years
• You are on track with all estimated tax deposits and payments

Appealing a Tax Lien

You are allowed to appeal a tax lien if you disagree with it. There are different ways to go about this, depending on the circumstances. Your tax attorney can look into the matter and direct you on the best way forward. 

Still, you can appeal your tax lien if the IRS made a mistake or if you have already settled your tax liability. 

You can also appeal if you believe your spouse or ex-spouse is or was solely responsible for the back taxes. 

The IRS will always notify you when it files a Federal Tax Lien against you. When this happens, you have 30 days to appeal. 

Tax Lien vs. Tax Levy

A tax lien lays a legal claim over your assets to guarantee payment for back taxes owed. There is no immediate intent to seize assets. 

On the other hand, a tax levy is the actual seizure of your assets to satisfy the back taxes owed. 

So one lays legal claim on assets, while the other is about the seizure of assets. 

Tax levies come in many forms, with the more common ones being levies on bank accounts and wage garnishment. A tax levy can also mean the IRS taking possession of your property and auctioning it. 

Typically, the IRS will file a lien before they levy. Still,a lien does not automatically mean a levy is on the way, either. If you take action to resolve your taxes after you get a tax lien, there will be no need for the IRS to proceed with a levy. 

The other difference between a tax lien and a tax levy is that tax liens are public records, while tax levies are not. Consequently, a tax lien will impact your credit rating, while a tax levy will not. 

Similar to tax liens, a tax levy doesn’t come out of the blue. The process goes about as follows:

• The IRS must calculate outstanding taxes and send the taxpayer a ”Notice and Demand for Payment.”

• The taxpayer fails to settle the outstanding tax following the notice
• The agency sends two additional notices to the taxpayer. The first is a ‘’Final Notice of Intent to Levy’’ and the second is a ‘’Notice of Your Right to a Hearing’’. These are sent 30 days before a levy is issued. 
• The IRS sends the taxpayer a notice informing them that it may begin contacting third parties for information about the taxpayer’s tax liabilities. Third parties, in this case, include employers, neighbors, banks, friends, and so on. 

Can A Tax Levy Be Released?

You can appeal for a levy to be released, though you still have to settle your liability. 

The IRS can release a tax levy if:

• You settle the amount owed
• The collection period ended before the levy was issued
• The levy hinders your ability to pay your taxes
• You enter into a payment plan that doesn’t allow for the levy to remain in play
• The levy creates economic hardship, making it impossible for you to meet basic and living expenses

What Next?

Taking quick, decisive actions is paramount when faced with an IRS levy or lien. Unfortunately, it’s sometimes unclear what these should be, and any missteps cost you. 

The best way out? Calling an experienced tax attorney with experience dealing with IRS liens and levies. And that’s precisely what we do at the Cumberland Law Group LLC. Get in touch with us today.