To stay in good standing with the IRS, you must avoid liens. But, what is a state tax lien and how can it be resolved? 

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A lien of any kind is a legal claim on a person’s assets or property, to serve as collateral for a debt. In practical terms, liens effectively allow a creditor to take precedence over other creditors and establish a priority for their debt to be repaid. A lien is not a forceful claim of a person’s assets or property. A lien is not enough to take away the farm, or sell the car, for example.

State and federal liens are some of the scariest liens to be exposed to. These have the backing of the government – and they usually occur because a taxpayer racked up a significant amount of tax debt and has been unable to repay their debt for some time.

When you have a lien against your tax account, you will have a significantly harder time seeking financing of any sort. Liens serve both as a pressuring tool for state and federal authorities (or large creditors) to coerce repayment, and as security. For example, a lien on your car means if you sell it, the proceeds must be used to satisfy your debt, first. You can take certain actions to bypass your lien, or even avoid it outright.

Explaining State vs. Federal Tax Liens

Different jurisdictions are responsible for collecting different taxes in different parts of the country, and each of them bear the individual responsibility to enforce either state or federal tax law. You might already have noticed that federal tax rules can often differ from state tax rules – and that some states have taxes that other states don’t.

A state tax lien is the same as a federal tax lien in both theory and execution, the difference being that the IRS is responsible for issuing federal tax liens, while local state governments issue state tax liens.

In California, for example, the Franchise Tax Board (FTB) issues a statutory lien on all property that you own or have the rights to in the State of California. This includes both real and personal property. You will receive mention of this via multiple notices and letters warning you of your tax debt, followed by a public Notice of State Tax Lien with one or multiple county recorders, as well as the Secretary of State in California.

In the past, both state tax liens and federal tax liens were effectively guaranteed to affect your credit score. However, times have changed. Credit reporting agencies are no longer reporting tax liens, despite liens being part of the public record. That being said, tax liens – both state and federal – can still have an impact on your credit.

A lien on your personal and real property may affect your ability to repay debts, seek financing, keep up with payments, and maintain your credit score. Part of the pressure of a lien is that it robs you of financial freedom and flexibility.

As with federal tax liens, state tax liens have an expiration date. The statute of limitations on state tax liens in California is ten years, for example. As with any other lien, however, this can be extended under certain circumstances. As with federal tax liens, state tax liens also attach to all real and personal property owned now and acquired in the future.

State tax liens are only attached to property you own or have rights to in that state. Federal tax liens attach to everything you own or have rights to.

Tax Liens vs. Levies

Tax debt is a serious crime, but not everyone in debt to their state or the IRS goes to jail for it. If you have accrued tax debt not out of malicious tax avoidance or illegal actions, but as a result of tardy payments, penalties, or even financial hardship, there are multiple ways to address and pay down your debt.

Failing to do so will lead to a lien. But failing to respond to the lien can lead to a levy.

Levies are what most taxpayers fear when dealing with the IRS or any state tax body. A levy represents a claim on a property, wherein the government (or another creditor, in a general sense) steps in a liquidates an asset, as debt repayment. This can be anything from real property (outside of your primary residence) to most personal property, including bank accounts.

If a levy was enough to settle your debt and pay off your due balance, you are usually given the remainder of what your property was worth. If it wasn’t enough, the tax agency may issue another levy.

Both state tax agencies and the IRS can also claim a levy on your wages. This is called wage garnishment, and it is managed through your employer. Your levy is calculated based on your income and number of total dependents, and a portion of your paycheck is withheld every paycheck, until your debt is paid.

While liens do not force you to sell or liquidate anything, they can serve as a foreshadowing of what is to come.

How Are Tax Liens Triggered?

Tax liens only occur as a result of unpaid tax debt. This might accrue over time, or could be the result of recurring penalties, for things like failing to file tax returns on time or failing to pay your due amount after the state or IRS amended your tax bill for the year.

For example, if you fail to qualify for a deduction you used to qualify for or are earning way more as a self-employed contractor but are still making the same quarterly tax payments, your local tax agency may investigate and correct your returns and demand payment for the missing taxes. As with other creditors and debtors, the IRS and state tax agencies levy both penalties and interest on tax debts.

How to Resolve a Tax Lien

There are very few ways to negotiate your way out of a tax lien. The simplest way is to resolve your tax debt. If you do not have the money to pay your debt outright, entering into a monthly installment plan and meeting your payment deadlines for at least three to four months in a row is often enough to resolve a lien.

If the reasons for the lien were erroneous to begin with – such as your tax agency making a mistake, such as striking down a deduction you do qualify for – you should talk with a tax professional about bringing this evidence to light, and getting your lien removed.

Both state and federal tax liens are usually only removed once you are both up-to-date with your tax payments, and up-to-date with your tax returns. You must file all missing returns to get back into good standing with state and federal tax agencies.

Federal and State Tax Lien Notices This August

This August marks an important time of the year for many delinquent taxpayers.

For one, the IRS has started Automated Collections Enforcement this month, on August 15^th.  This means that both liens and levies will be issued against taxpayers behind on their payments. If you have received a final notice of intent to levy, or received any letters about federal tax liens, contact a tax professional immediately.

Secondly, multiple counties and states have pushed the dates for tax lien sales to this month. This means that this may be one of your last chances to resolve your tax lien before your debt is sold (at which point you will have to pay the buyer, and redeem your property).

Tax liens can be frightening to deal with. But with the right professional help at your side, you can work to resolve your lien and reclaim your properties.

Contact our tax professionals today if you have received a federal or state tax lien.

A lien can significantly and negatively impact your life, but when does the IRS file a tax lien and how can you remove them?

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Tax liens are issued against individuals with an outstanding tax balance who have failed to address their debt before a given deadline. For taxpayers with a tax debt of more than $10,000 (up from a $5,000 minimum, due to the Fresh Start program), a tax lien will be issued 10 days after a demand for payment is left unaddressed or unanswered.

A tax lien when issued by the IRS represents the US government’s interest in a taxpayer’s assets and property in the form of a legal claim, effectively overriding other creditors and ensuring that, should the taxpayer sell their assets or property, the lien dictates that their debt to the IRS will be prioritized over any other debt.

Until the taxpayer liquidates their assets or property, or files for bankruptcy, a tax lien does not actually claim anything. Instead, it simply represents the government’s claim. However, this can still have a significant negative impact on your finances and prospects, as the government’s claim takes priority of any current and future creditors, meaning seeking financing can become complicated.

Worse yet, a lien usually leads to a levy if the respective taxpayer doesn’t take prompt action to settle their account with the IRS. Levies are much more intrusive, as the government can clean out one or multiple bank accounts, seize properties, and garnish wages.

However, the IRS does not issue these lightly, but when does the IRS file a tax lien or levy? There is a process for getting a tax lien issued against you, and you often have multiple opportunities to have it withdrawn, usually by coming to an agreement with the IRS and beginning a payment plan.

When Does the IRS File a Tax Lien?

Before the IRS sends out a public Notice of Federal Tax Lien pertaining to your account, they will assess your tax account and establish that you owe them money, send you a bill (in the form of a Notice and Demand for Payment), and give you time to respond.

1. 1. 1. If you can pay your tax liability, then you can opt to pay the IRS immediately via a bank transfer, debit card, and other options.
      2. If you don’t have the money on-hand, you can opt for a short-term (within 120 days) or long-term (within more than 120 days) payment plan to settle the account.

But if you fail to respond altogether, neglect your duty to pay, or refuse to pay without going through the legal process to appeal the IRS’ decision, they may issue a public notice. This Notice of Federal Tax Lien serves as a notification for creditors that your assets and property are under a tax lien. You will also receive a personal notice from the IRS, informing you of the tax lien on your assets and property.

In the past, these liens would show up on your credit report, drastically reducing your credit score and affecting your credit for years, about as long as a bankruptcy.

However, the three major credit bureaus decided in 2018 to remove tax liens from all current and future credit reports, meaning your credit score is no longer negatively affected by a tax lien – although it can still be indirectly affected, if the tax lien affects your ability to pay off other debts or make certain payments on time.

Getting Out of a Tax Lien 

The only reliable way to get out of a federal tax lien is by beginning the process of paying off your tax debt. You need not completely pay off your debt to have a lien released - if you manage to reduce your remaining debt to less than $25,000, have made at least three consecutive payments on time, and are up to date with your tax returns and estimated tax payments, the IRS may release the tax lien on your property.

Note that if you become tardy with your payments, they can resume the lien. If you have defaulted on a previous payment plan with the IRS, you cannot seek a lien withdrawal before your tax debt is completely paid off.

Another way to remove a tax lien is by arguing that the IRS has miscalculated your tax liability and proving that you don’t owe anything. You can appeal the IRS’s decision to file a lien against you if they didn’t go through the proper procedure either (such as failing to notify you of your tax assessment or failing to give you the full ten days you’re warranted). You can speak with a tax law professional if you plan on appealing the IRS’s decision or taking them to court.

However, there are other ways of having a lien’s impact on your life reduced, usually for the purposes of enabling you to pay the IRS what they’re owed. This is where subordination and discharging a lien become relevant, especially if you can rely on certain kinds of financing to help pay off your tax debt.

Tax Lien Subordination and Discharge

Tax liens are on all your assets and property. But if you can make the case that letting certain creditors take precedence over the government or exempting certain property from your lien can help you pay off your debt, you may be able to seek a subordination or discharge of a lien.

A subordination occurs when the IRS agrees to let a specific creditor’s interest take precedence over their claim on your property. It represents an exception to the lien from the creditor’s side. See Publication 784.

A lien discharge can be applied to a specific asset or property, allowing you to use it as collateral when seeking financing for your tax debt.

Tax Liens While Currently Not Collectible

While you can get a tax lien withdrawn if you’re making payments to the IRS, filing for currently not collectible status will not have your tax lien withdrawn. The IRS can continue to hold a legal claim on your property but may not engage in other collection tactics (such as graduating to a levy).

If you have received a notice from the IRS that a federal tax lien has been issued against you, a tax law professional can help you figure out your next steps. Liens can have a significant impact on your ability to pay the bills and keep your life afloat, and a tax professional can help you navigate payment options with the IRS, seek a discharge from certain property or help with filing for subordination.

There can be consequences of receiving a Notice of Federal Tax Lien. One of the main concerns is: how long does a tax lien stay on credit reports?

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The IRS utilizes federal tax liens as both a deterrent and a part of their collection process. When a taxpayer has a hefty unpaid tax debt, federal tax liens are part of the agency’s strategy for encouraging payment. The IRS will first assess your total liability and respond to a failure to contact them or begin payment through a public Notice of Federal Tax Lien. This information no longer automatically appears on your credit report, but it can affect you financially.

Unlike levies, liens don’t involve any forfeiture of assets, or an actual claim on an account’s contents. Instead, a federal tax lien represents the government’s interest in your property, above any interest or claims from other creditors. Although a tax lien is not on a credit report, this can negatively impact your ability to get credit, as the government now has first claim on anything and everything you own. Previously, it used to have rather substantial consequences for your credit report as well.

What is a Federal Tax Lien? 

When a taxpayer’s debt to the IRS reaches $10,000 or more, the IRS may file a public notice called a Notice of Federal Tax Lien. This lien is a claim placed on all your property and assets, from bank accounts to homes, vehicles, and more. It supersedes any claims made by other creditors, now and for as long as the lien is in effect.

In practical terms, a lien acts as a way for a creditor to secure the payment of debt by claiming the value of a debtor’s property. If ignored, the IRS may turn a lien into a levy, wherein they claim a property, empty an account, or order your employer to withhold a portion of your wages.

Even when liens don’t become levies, they can have dire consequences, particularly if you wish to seek refinancing. You cannot sell property affected by the lien without first paying the IRS, and you’ll have a hard time securing any credit. Because you don’t have anything to secure a loan, it’s difficult to get a bank or lender to cooperate. When it comes to a tax lien and credit reports, liens can no longer be automatically reported on your credit report. However, the lien itself is still public, and may affect your ability to secure a credit for some time. 

Liens remain in place until they are lifted by the IRS. The IRS will withdraw a lien under certain circumstances, the simplest of which is to completely pay off your tax debt. Making a genuine effort to pay off your tax debt is often enough to have a lien lifted as well, provided:

1. 1. Your total tax debt is under $25,000 (after counting payments already made)
   2. You’ve made at least three payments,
   3. And you have a direct debit installment payment plan with the IRS

A Federal Tax Lien On Credit Reports

Currently, tax liens no longer have a concrete effect on your credit score. This is due to a recent change made in 2017 and 2018, when the three national credit bureaus (Experian, Equifax, and TransUnion) removed tax liens from credit reports, and changed the rules so that federal tax liens wouldn’t be automatically taken into account when calculating a consumer’s credit score.

These changes were made after a study by the Consumer Financial Protection Bureau (CFPB) found that reporting issues too often led civil judgments and tax liens to be linked to the wrong person, and that these reporting issues had detrimental effects on consumers with an otherwise good credit score.

Prior to this change, tax liens would remain on a credit report for up to seven years even if paid, and ten years if unpaid, negatively affecting their score by up to three figures (exact numbers are unknown, and would depend on the individual and how their credit is affected by FICO’s calculations).

Why You Should Still Worry About Liens

Even though tax liens are no longer automatically added to your credit report, they remain public information, and will affect your ability to seek credit while under the effects of a federal lien. Furthermore, ignoring a lien can lead to an IRS levy, which has a much more immediate effect on your finances and property.

Your options for combatting a lien are limited, but if you find that the IRS filed a lien incorrectly (either because you find you owe less than they claim you do, or because the notice wasn’t filed as it should have been, or some other dispute), you can consult the National Taxpayer Advocate Service, the IRS’s Independent Office of Appeals, or eventually take the matter to the US tax court.

If you are worried about your federal tax debt and a potential or existing federal tax lien, we strongly encourage you to seek the advice of a professional. Because tax debt continues to accrue interest and penalties, time is of the essence.

Getting Help with a Federal Tax Lien 

Whether it’s the threat of levy or problems with securing credit, getting a tax lien removed as quickly as possible is always within your best interest. The IRS itself recommends that taxpayers pursue either discharge or subordination in cases where they wish to seek financing to pay off their debt.

• • Filing for discharge lets you remove the government’s lien from a specific property, which can help you seek financing.
  • Subordination, on the other hand, gives the taxpayer the option of naming a creditor to supersede the government’s claim.

There are limitations and considerations for both discharges and subordination, so consult a tax professional for more information regarding your specific circumstances.

Ultimately, entering a payment plan with the IRS or clearing up your debt outright is the most reliable way to completely removing a lien. If your debt has reached an unreasonable amount, and you are worried about your ability to pay it off within the next few years, a tax relief professional can help you explore your options, including a potential Offer in Compromise.

While a federal tax lien is not on a credit report anymore, their effects may indirectly affect your credit score for some time. If a tax lien is being reported on your credit report after 2018 (you can get a free credit report once a year from each of the three major bureaus), note that you do have the option of filing a dispute. Ask your tax relief professional for more information, and review what a sample dispute letter looks like through the FTC.

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