Placing a tax lien against your property allows a county, state, or federal government to take possession of it if you fail to pay property or income taxes. The property can then be sold to recoup the amount of taxes that are due and owing.
This doesn't occur right away, however. The government taxing authority should send you several notices and bills for the taxes due before finally filing a tax lien against your property as a last resort.
How to Prevent a Tax Lien
You can prevent the IRS from filing a federal tax lien against you if you're able to pay the tax in full before the lien is filed. You can also prevent a lien by setting up a payment plan or installment agreement with the IRS if you're unable to do pay the tax debt in full in a single lump sum. It really just wants you to address your debt rather than ignore it.
Paying in full as soon as possible is always a preferred option for taxpayers who want to protect their credit standing.
The IRS offers a short-term payment plan if you can come up with the money within 180 days, as well as long-term installment agreement options. A tax lien won't be filed against you if you enter into one of these arrangements, provided that you don't default on payments.
Liens Are Different From Levies
Some people use the words "lien" and "levy" interchangeably, but they're two quite different collection measures.
A tax lien is a document that the IRS files with your local government to ensure its ability to collect the money owed. It prevents you from selling the property without the lien being paid from the proceeds, and the government can force the sale in order to be paid.
A levy is the forced collection of taxes due, typically by garnishing your wages, salary or bank accounts.
Liens Are Public Records
Tax liens are public record because they're on file with your local government. They'll appear in the public records section of your credit report. They're considered to be one of the most negative credit report entries and they can damage your credit score as much as a bankruptcy or foreclosure.
A tax lien entry on your credit report can keep you from being approved for future loans, credit cards, apartment rentals, or even a job.
The normal credit reporting time limit doesn't apply for unpaid tax liens. They can remain on your credit report indefinitely, but a credit bureau might remove it within 10 to 15 years, depending on their policies. Unfortunately, this is discretionary, not mandatory.
Paid tax liens can remain for seven years unless they're withdrawn by the IRS, which should happen when the tax debt is paid. It's almost like the lien was never filed in the first place when it's withdrawn. No hint should appear on your credit report, but mistakes can happen. You might have to send the credit bureaus proof of the tax lien withdrawal in order to have it removed from your credit report.
Tips for Removal From Your Credit Report
You can have the lien withdrawn and removed after you've satisfied the tax obligation if it was filed by the federal government. The IRS indicates that it will release the lien within 30 days after your tax debt is paid off.
You must have filed your tax returns for three previous years to qualify for the 30-day removal, or you must show that you weren't required to file according to federal rules. You must also be current on any estimated taxes and federal tax deposits you might owe.
Certain taxpayers might also be able to have the tax lien withdrawn by entering into a direct debit installment agreement with the IRS. This allows them to automatically withdraw regular tax payments from your bank account at scheduled intervals. You must owe $25,000 or less to qualify, and have made at least three consecutive payments. Other rules also apply.
Your state might offer a similar tax lien withdrawal procedure, but you'll have to contact its Department of Revenue to find out what the procedure is and how you should apply. The tax lien will most likely follow the normal credit reporting timeframe if it's paid in the absence of a process for tax lien withdrawal.
Consider consulting a tax professional about the best way to proceed if you're having issues with a tax lien to ensure that all procedures are followed correctly.