When Does the IRS File a 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?

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 There is a process for getting a tax lien issued against you, and you often have multiple opportunities to have it withdrawn, usually by coming to an agreement with the IRS and beginning a payment plan.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. 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.

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