The Internal Revenue Service (IRS) files federal liens against taxpayers who have unpaid tax obligations. A federal tax lien is a document that goes on record with a county government as a matter of public record, usually in the location where the taxpayer lives or conducts business. It notifies the general public that the taxpayer has an unpaid federal tax debt.
Liens can attach to the taxpayer's real property or personal property. They record the full amount owed to the IRS. If a taxpayer sells property that has a lien attached to it, then the IRS is paid out of the sales proceeds before the taxpayer receives any money.
Liens vs. Levies
The words "lien" and "levy" are sometimes used interchangeably, but liens are different from levies. A tax lien is a document filed by the IRS to protect the government's ability to collect money, while a levy is the forced collection of tax, usually by confiscating money directly out of a bank account or paycheck.
One easy way to tell the difference between a lien and levy is to ask yourself whether you still possess the property in question. A lien attaches to a property so the IRS will receive payment when that property is sold. A levy actually takes the property to collect a tax debt.
Notifying Taxpayers That a Lien Has Been Filed
The IRS will remind you of the tax debts you owe before it imposes a lien. The first step in the process begins when the IRS sends a notice of taxes owed and a demand for payment. Ten days after that, the lien will automatically take effect. At that point, the IRS may also file a notice of federal tax lien in public records. This could have negative effects on your finances.
Preventing a Lien
Federal tax liens can be prevented by paying the tax in full before a lien is filed by the IRS, but that's not always possible for all taxpayers. If you can't pay the entire amount in one lump sum, you can prevent liens by setting up an installment agreement with the IRS that meets certain requirements. The IRS won't file a federal tax lien if a taxpayer sets up either a guaranteed installment agreement or a streamlined installment agreement. However, it's up to the taxpayer to voluntarily reach out to the IRS to establish these plans. The IRS won't prompt them to use these plans to avoid a lien.
These types of installment agreements require that the outstanding balance be $10,000 or less (in the case of a guaranteed installment agreement) or $25,000 or less (in the case of a streamlined installment agreement).
There are payment plans available for those who owe more than $25,000, but they will require more information for the IRS. You could also pay down enough of your debt to bring the balance below $25,000—then you can establish a streamlined installment agreement.
The best way to prevent a tax lien from being filed is to bring your outstanding balance under $25,000 and set up an installment agreement. You could become eligible for a streamlined installment agreement, and no federal tax lien would be filed. Your options are much more limited after the IRS has filed a tax lien.
Removing a Lien
The IRS will remove a federal tax lien if the lien was filed in error, when the outstanding balance is paid in full, or when the outstanding balance is otherwise satisfied, such as through a successful offer in compromise. It will also remove the lien if it becomes unenforceable, which can happen if it's expired due to the 10-year statute of limitations.
There are two basic ways to remove a federal tax lien: withdrawal and release.
Withdrawing a Federal Tax Lien
The IRS will rescind (or "withdraw") a federal lien if it was determined to have been originally filed in error—such as when the wrong taxpayer is targeted for a debt. In that case, it's as if the lien had never been filed in the first place.
If you believe that such a situation could apply to you, and a lien was filed against you by mistake, then you should contact the IRS right away. An IRS agent will review your account history to verify that you don't owe the outstanding tax and will prepare the paperwork necessary to withdraw it.
The IRS has instituted a Fresh Start Program under which taxpayers might be eligible for lien withdrawal, provided certain criteria are met.
Releasing a Federal Tax Lien
Releasing a federal lien means that the lien no longer encumbers the property. County records will be updated to reflect that the lien has been released. Liens are released within 30 days of full payment of the outstanding tax obligation, or upon setting up a guaranteed or streamlined installment agreement.
The IRS might release a federal tax lien if it will speed up the collection of tax or if it's in the best interests of the taxpayer and the government, but most federal tax liens are automatically released by the IRS after full payment of the tax owed.
Under the Fresh Start Program, taxpayers can be eligible for lien release if their outstanding balance is under $25,000. You might consider bringing your balance under $25,000 by transferring some or all of your tax to a credit card or home equity line, or by making payments to bring your balance under the $25,000 threshold.
How a Federal Tax Lien Impacts Your Credit
Lien information used to be picked up by the three major credit reporting bureaus. However, in 2018, all three agencies stopped collecting, and removed, all information about tax liens from credit reports. That means that tax liens no longer show up on your credit report.
However, while the tax lien isn't officially part of your credit report, the IRS can make it public information. That means that lenders, credit card companies, landlords, and potential employers could learn about liens against your property. They may use that information to make a judgment about you—such as a decision on a new loan, new rental, or a new job.
Where to Get Help
Taxpayers who need assistance in dealing with tax liens and tax collections should seek the advice of a federally authorized tax practitioner, such as a tax attorney, a certified public accountant, or an enrolled agent. Taxpayers can also receive free help from publicly funded tax clinics and the Taxpayer Advocate Service.