An IRS tax lien is a legal claim on your property for the amount owed. An IRS tax lien is also the legal right to collect on the amount owed.
An IRS Tax lien starts when a tax is assessed and you don’t pay it. For example, if you file a tax return owing $50,000 and you do not pay it, then you will be “assessed” the tax, penalty and interest on that $50,000. The IRS will send you a “Notice and Demand” asking you to pay the assessed balance. You are usually given 10 days to make the payment. If you do not pay it within 10 days, then a lien arises automatically dating back to the time the assessment was made. This is what I would call a silent tax lien or statutory lien because no one really knows it is there and it is created by federal statute, Internal Revenue Code sections 6321 and 6322.
The statutory lien that arose when your tax liability was assessed allows the IRS to start collections. We normally associate creditor collections with a judgment obtained via litigation or a UCC filing given voluntarily by the debtor allowing the creditor to take your property or money without your consent. However, the IRS need not obtain a judgment like other creditors in order to forcibly collect monies due. In this regard, the IRS is a “supercreditor.”
The IRS will usually file a Notice of Federal Tax Lien eventually. This gives notice to other creditors and the public of the IRS priority on your property. However, the IRS does not need to file its tax lien before it garnishes wages or levies bank accounts. More about “filed” tax liens below.
Internal Revenue Code Section 6322 authorizes a general tax lien to remain in place until the liability is paid or the lien becomes unenforceable by lapse of time. The life span of the general tax lien is 10 years because the IRC allows 10 years under Section 6502 for the IRS to collect upon its lien. As an example, if the above $50,000 tax balance was from a return filed on April 15, 2015, then the IRS has until April 15 2025 to collect it. Thus, the lien remains intact until April 15, 2025 and is then automatically released.
Havoc may ensue due to the general tax lien IF YOU DO NOTHING. The general tax lien coupled with a notice of intent to levy makes it lawful for the IRS to levy your bank account, seize non-exempt assets, levy accounts receivable, and garnish wages and social security benefits. Start dealing with the debt by filing any missing returns, paying your current taxes, setting up a payment plan, and contacting an attorney with experience handling tax collection cases to help you.
If you own a corporation or LLC and it owes taxes, whether income tax or employment tax or penalties, the lien only applies to property owned by the corporation or LLC (though, note that the IRS may eventually hold responsible persons within a corporation or LLC personally responsible for unpaid “trust taxes,” after which it may file a lien against those individuals). An IRS lien filed against a corporation or LLC does not extend to the owner(s) or the owner’s property, and vice versa. The IRS tax lien covers all property and “rights” to property owned by the taxpayer/debtor regardless of where the property is located or who currently possesses the property. There are a few exemptions from the lien coverage which fit into the category of basic living allowances such as food, clothing, a portion of your wages, and unemployment income (See IRC 6334).
Like other creditors, the government has to “file” its lien in order to give notice to other creditors of its claim on your property. There is no precise prediction for when a lien will be filed. But generally, the higher the liability and the more time has passed after the initial assessment, the more likely it is that the IRS will file its lien.
The date of the filing of a lien provides all your creditors an order of payment upon sale, liquidation, foreclosure or seizure of property that you own. First filers get paid first and so on. A letter is sent to the taxpayer with a copy of the “Notice of Federal Tax Lien” showing that they filed a lien with the Secretary of State and/or County Clerk’s office for any counties in which you own real estate. The tax lien filed with your Secretary of State will cover all personal property such as your vehicles, boats, and other movable property in the state in which you reside. The filing with the County Clerk allows the government to cover your real property situated in that county. The IRS Tax lien attaches to your property and follows the property if it is transferred unless the lien is paid off, the property is discharged from the tax lien or the lien is otherwise extinguished. In general, though, the lien follows the property.
To compare the difference between a statutory lien and a filed lien, imagine selling your house. If the government has NOT filed a tax lien, then the proceeds generally would NOT be secured by the statutory lien and do NOT automatically go to the government even though the IRS has a legal claim on the proceeds. If a tax lien HAS BEEN FILED and you sell your house, the government gets paid before you receive any proceeds.
Aside from limited exceptions pertaining to inventory and accounts receivable, a filed tax lien cannot jump ahead of other valid liens or judgments against you. The Government stands behind other valid secured creditors provided they have properly filed their lien or judgment prior to the filing of the Notice of Federal Tax Lien. There are exceptions which business owners should pay attention to, particularly those who use accounts receivable or inventory as collateral for financing. If your business relies on receivable or inventory-based financing, I strongly encourage you to click here for an in depth look at how a tax lien can quickly become catastrophic.
The “silent” tax lien means the government has a right to your property and if you sell your property subject to the silent tax lien, you are supposed to pay the government. As a practical matter, until the IRS has filed its tax lien and secured its interest in your property, it cannot direct what you do with the proceeds of the property you sell.
By the time you receive your “Notice of Federal Tax Lien” the lien has ALREADY been filed. Remember, once the liability is assessed, there is already a statutory or silent tax lien hovering over you. It is only one more step for the IRS to prepare a tax lien on paper and send it to your county and state to put everyone on notice. I can’t predict how long it will take for the IRS to file a tax lien. If your case is in ACS (Automated Collection Service), the lien may take longer to file. If your case is with a Revenue Officer, he or she has a duty to secure the government’s interest and will typically file liens when it becomes evident that the taxpayer cannot pay the balance in full, if not sooner.
Once a tax lien is filed, it is notice to the public and, importantly, credit bureaus that the IRS has a right to your property. It is a red flag to the credit bureaus that you are in financial trouble, thus you can expect the immediate sinking of your credit score once a tax lien is filed.
The IRS generally does not force you to sell your house, your cars or your other personal property in most circumstances. However, if your property and income is above a meager standard of living, you can expect the IRS to demand that you sell or borrow against the property that you don’t need and use the proceeds to pay the government. If you fail to cooperate with the IRS in resolving the liability or are unwilling to make the monthly payments that they demand, then the IRS could proceed with seizing your non-exempt property. This is typically done after the IRS has attempted to levy your income, bank accounts, and other accounts, but was unable to collect the unpaid tax liability.
Let’s say you owe the IRS $90,000. Your house is worth $750,000. There are two mortgages against it filed in 2000 and 2005 to which you owe $650,000 total. The IRS FILES its tax lien for $90,000 in JULY 2015. In AUGUST 2015, a judgment lien is FILED by one of your creditors for $20,000. The mortgages were filed before the tax lien, so they get paid first in the event of a sale, seizure or foreclosure. The tax lien was filed before the judgment creditor, so the IRS gets paid second. The encumbrances against your home total $650,000 + $90,000 + 20,000 = $760,000. You sell your home for $750,000 (and, for simplicity, assume there are no closing costs such as realtor commissions). The bank gets paid, the IRS gets paid, your judgment creditor gets paid only $10,000 and you are left with $0. In this case, if the tax lien had not been satisfied, you would need to “discharge” the property from the tax lien before the buyer takes it, otherwise the lien will follow the property to the new owner.
If the IRS is pushing you to sell your home, and you want to stay in it, you need to talk to an attorney to help you negotiate some breathing room and an alternative solution to selling your home.
When you receive a Notice of Federal Tax Lien, it will give you 30 days to file an appeal. You might have a reason to appeal the filing of a lien if you don’t actually owe the money or if it was filed against the wrong person. If the lien is technically valid, then you might be able to appeal the lien filing on the basis that a “withdrawal” of the lien would make collections easier for the IRS. Or, if the lien is a detriment to your credit or business operations, the IRS may withdraw, but may require some sort of backup such as a bond to secure its interest in place of filing a lien.
The Notice of Federal Tax Lien will tell you where it was filed and when it is going to be released. When a tax lien is filed, the IRS gets an extra 30 days on top of the 10 years from the dates of assessment before the filed lien is released. These notices will be sent via certified mail to the address that the IRS has for your last known address.
The IRS will put a hold on filing a tax lien for personal income taxes if the taxpayer’s balance is LESS than $50,000 AND if the taxpayer agrees to a direct debit payment plan to pay off the balance in 72 months or less. So, if you have been assessed and you owe less than $50,000, you may be able to avoid the filing of a tax lien and its corresponding negative effects by setting up a direct debit payment agreement. If you cannot make the payments in the 72-month period or you do nothing about the tax liability, you can be confident that the IRS will eventually file a tax lien.
To sum up, the negative effect of a statutory or silent tax lien is that the IRS can start the collection process leading to levies and garnishments. The negative effects of a filed tax lien are that you can’t sell your property without the IRS taking its share, and your credit and business credibility are hurt. In both cases, you are under the shadow of the lien until the 10 years has passed from the date of assessment or until the debt is paid off in full.
A last point on IRS settlements: if you are successful in settling your tax debts with an offer in compromise, tax liens will be released only when the settlement amount is PAID. So if you owe $100,000 and a tax lien has been filed, but you settle for $10,000, you have to pay the $10,000 settlement and THEN the tax lien on the $100,000 will be released.