Tax Liens: What You Need to Know

It’s no secret that tax liens constitute a significant enforcement action by the IRS. And if you’re unable or rather struggling to meet your tax obligations, you face the risk of a tax lien. 

In this post, we’ll cover the basics of tax liens, such as what they are, their different types, how they work, the legal and financial ramifications of getting a tax lien placed on your assets, and more.

What Are Tax Liens?

Tax liens are an important component of the fiscal system that the government employs to make sure that taxpayers meet their tax obligations.

A tax lien is a legitimate claim placed on the property of a taxpayer who neglects to pay taxes. It’s a method the government uses to safeguard its interest in collecting taxes owed by businesses and individuals. In other words, a tax lien grants the government the authority to seize the taxpayer’s property if they fail to pay their taxes, and it may seriously influence the taxpayer’s credit score.

Therefore, understanding tax liens is vital to anyone who wishes to remain compliant with their tax obligations and avoid the possible financial and legal implications associated with them.

Understanding the Tax Lien Process

A tax lien starts when a taxpayer receives a letter – in other words, a notice and demand for payment – detailing the amount of taxes owed. Assuming the taxpayer cannot settle the tax liability or fails to at least try and resolve it with the Internal Revenue Service (IRS), the government may issue a lien against their assets.

The lien applies to all of the person’s assets, including real estate, vehicles, and securities. Moreover, any assets acquired by the taxpayer while the lien is in place are also subject to the lien. It also applies to any company assets as well as the company’s accounts receivable.

Even if the taxpayer files for bankruptcy, the tax liability, and the lien may remain. Bankruptcy proceedings can eliminate most liabilities but not federal tax debt.

Types of Tax Liens

Tax liens come in various forms, including:

• Property Tax Liens

This sort of lien is imposed on a property by a local government overdue property tax. It grants the government the power to sell the property to recover unpaid taxes. Property tax liens are often prioritized over other claims or liens on the property, meaning they should always be settled before other liens. 

• Federal Tax Liens

The Internal Revenue Service (IRS) places this type of lien against a taxpayer’s income, property, or assets for outstanding federal taxes. As you’d expect, the lien allows the federal government to seize the taxpayer’s income or assets to collect overdue taxes. Like property tax liens, federal tax liens are also prioritized over other claims and liens on the taxpayer’s assets.

• State Tax Liens

A state tax office may issue a lien against an individual’s income, property, or assets for unpaid state taxes. This means the state government can seize the taxpayer’s income or assets to recover overdue taxes. State tax liens are also favored over other claims on the individual’s assets.

• Special Assessment Liens

This is a lien issued against a property by a local government to cover the costs of a special assessment – a levy imposed on the property owner to contribute towards services or improvements in the area. 

• Municipal Tax Liens

A municipal tax lien is a lien imposed against a property by a municipality for owed taxes relating to services offered by the city, like electricity, sewage, or water bills.

Impact of Tax Liens on Individuals and Businesses

Tax liens can have dire implications for individuals and businesses, impacting their ability to sell or own property, financial stability, and credit ratings. Here are a few ways tax liens can affect persons and firms:

1. Credit score damage: Tax liens are a bad record on anyone’s credit report and, therefore, can drastically harm their credit rating, limiting their ability to get loans or credit in the future. A tax lien may remain on a person’s credit record for as long as seven years after it’s released or settled.
2. Foreclosure Risk: If a tax lien is not addressed, the government may commence foreclosure proceedings to allow them to acquire the property and auction it off to clear the due tax liability. This could lead to the loss of property and the property owner’s equity.
3. Trouble Selling Property: Tax liens can make selling a property difficult since they must be settled before transferring ownership. This makes it nearly impossible to sell a property quickly. It may also lower its value because potential buyers may be unwilling to acquire a property with a tax lien.
4. Greater Financial Burden: When a tax lien is not cleared promptly, penalties and interest will accumulate, greatly increasing the property owner’s debt burden.
5. Legal Consequences: Failure to resolve a tax lien can make the government take legal action to recover the amount. This may include bank account levies, and wage garnishment, among other legal implications.

Tax Lien Redemption and Release

As mentioned earlier, tax liens grant the government authority to seize businesses’ and people’s assets if the owed taxes aren’t settled after a specified time frame. But it doesn’t always have to end that way. There exists an option for property owners to either redeem or release the tax lien. Let’s see what they both mean.

Tax Lien Redemption

Tax lien redemption is when a property owner or taxpayer settles their owed taxes, penalties, and interest on a property to lift the lien. The opportunity is accessible in most places, albeit the procedure and criteria for redemption tend to differ across states and counties. 

Generally, however, the tax lien redemption process entails clearing the entire sum of the unpaid tax bill and any penalties and interest owed. Property owners may also be liable for expenses linked to the redemption process, like processing or administrative fees, depending on the jurisdiction.

The tax lien is released once the redemption is finalized and the property owner reclaims full possession of the property. Any other parties involved, such as title insurance companies or mortgage lenders, may also require proof of lien redemption from the property owner.

Tax Lien Release

On the contrary, a tax lien release is the process by which the government lifts a tax lien on a property before the complete payment of the existing tax debt. A tax lien release could occur due to the following reasons:

• Payment plan or settlement agreement: If the property owner agrees to a settlement agreement or payment plan to settle their unpaid tax debt over time, the government may consider releasing the tax lien.
• Partial payment of the pending tax debt: In some instances, the government may concur to remove a tax lien in exchange for payment of a fraction of the owed taxes by the property owner.
• Bankruptcy: If a property owner declares bankruptcy, part of the proceedings may involve releasing the tax lien. However, this may or may not work.
• Error: If the government imposed the tax lien on the wrong property or rather made an error when placing the lien, it may be willing to release the lien.

Quick tip? It’s vital to understand that a tax lien release only strips the tax lien from the property but doesn’t remove the underlying tax liability. One is still obligated to pay the tax debt, and penalties and interest may accrue until the liability is fully settled.

Tax Liens Resolution and Prevention

Tax liens can pose severe implications for property owners, including foreclosure, credit rating deterioration, and even property loss. Nevertheless, property owners have a few actions they can take to remedy any tax lien issues that could emerge and avoid getting tax liens imposed on their property. 

Resolution

• Pay Off the Tax Lien: If you have a lien on your property, paying it off quickly is the most feasible solution. This will lessen the risk of foreclosure and protect your credit score. 
• Challenge the Lien: You have the right to dispute a tax lien if you feel that the tax debt amount is questionable or if the lien was mistakenly imposed. This may entail court proceedings or administrative appeals. 
• Negotiate a Release: There exist situations in which negotiating a tax lien release with the government may be achievable. Settling for a lower amount, establishing a payment plan, or making a lump sum payment are all possible options.
• File for Bankruptcy:  Although not the best solution, bankruptcy can help alleviate tax debt in some situations. However, it’s crucial to understand that filing for bankruptcy is typically a long process with numerous rules, and it may not always work.

Prevention

• Pay your tax bills on time: Paying your taxes on time is the most efficient approach to prevent a tax lien. Budget accordingly to avoid getting behind on your taxes and know when your taxes are due. 
• Check for mistakes and errors: It is critical to analyze tax notices and bills often to ensure that the information they carry is accurate. In case of any discrepancies or errors, you should inform the tax authority immediately so that the matter can be remedied before it escalates into a larger issue.
• Establish payment plans: If you have difficulty paying your taxes, consider establishing a payment plan with the government. Luckily, most states have schemes that enable property owners to pay in installments over time.

Wish to Resolve a Tax Lien on Your Property?

Tax liens are a vital tool for the government to recover outstanding taxes. However, at the same time, they can seriously affect individuals and businesses altogether.

As mentioned in this post, one may avoid tax liens by staying on top of their tax liabilities and paying their taxes on time. Also, if you’re faced with a tax lien, it’s best to take action quickly to prevent further financial and legal repercussions.

That said, our experienced tax attorneys at Cumberland Law Group are here to help you resolve all your tax-related issues, tax liens included. So, don’t hesitate to contact us today.