When the IRS files a Notice of Federal Tax Lien, taxpayers often worry that the IRS is just moments from seizing their home, draining their bank accounts, or garnishing their wages. A tax lien is serious, but it does not mean that you’re out of options. Understanding what a federal tax lien is – and what it isn’t – can help you make the best decisions for your tax situation moving forward.
At Tax Network USA, Inc., we are committed to helping taxpayers like you resolve their tax situations in ways that set them up for long-term compliance. Whether the IRS has already filed a tax lien or you believe a lien is imminent, we’re here to help. Discuss federal tax lien help options with our team online or call us at 1-855-225-1040 now.
Key Takeaways
- A federal tax lien is a legal claim against your property for unpaid taxes.
- Tax liens attach to current and future property, such as homes, vehicles, and financial assets.
- Federal tax liens don’t appear on credit reports, but they are still publicly recorded.
- There are four main ways to resolve a tax lien: release, withdrawal, discharge, and subordination.
- Ignoring a tax lien may lead to asset seizures, wage garnishments, and bank levies.
What is a Federal Tax Lien?
A federal tax lien is automatically created when the IRS assesses a tax liability, bills the taxpayer for the debt, and does not receive payment. Per IRC Section 6321, the lien attaches to all the property you currently own and rights to property. The lien also attaches to any future property you own for the duration of the lien.
The statutory lien that arises automatically any time you owe a tax debt is not in the public record, but if you don’t pay or make payment arrangements, the IRS will file a Notice of Federal Tax Lien. This shows up in county public records, indicating to creditors that the government has a legal claim against your assets. Liens attach to real estate, homes and rental properties, vehicles, business assets, financial accounts, and all other assets.
The IRS may eventually escalate to a levy if you do not resolve the lien, which is when the agency seizes wages, financial accounts, and eventually physical assets. This process is explained in IRS Publication 594, which delves more into the agency’s collection process and what to expect if you don’t pay taxes.
Does a Tax Lien Show Up On Your Credit Report?
A federal tax lien does not show up on your credit report or affect your credit score, per Experian, one of the three major credit bureaus. If you look up this question online, you’ll find many sources assertively telling you that a federal tax lien will show up on your credit report and even affect your credit score, but that’s not true – in 2017, the three credit bureaus decided to take certain tax lien data off of credit reports. All tax lien data was removed from credit reports by April of 2018.
This means that a federal tax lien does not appear on your standard credit report, nor does it affect your credit score. However, tax liens still affect your borrowing opportunities. Federal tax liens appear in public records databases, title searches, and county records. This means that creditors and underwriters can still come across them, and searching for liens is a fairly standard part of most loan application processes, such as mortgages and car loans.
Note that even though federal tax liens do not appear on credit reports, state tax liens (such as those filed by the California Franchise Tax Board) may follow different rules.
How Long Does a Federal Tax Lien Last?
As a general rule, a federal tax lien remains in place as long as the IRS can legally collect a debt. This collection period usually lasts 10 years from the date that the tax debt was assessed, ending on the Collection Statute Expiration Date (CSED).
Although 10 years is the general timeline, there are many things taxpayers do that pause the statute, including:
- Filing for bankruptcy
- Requesting an offer in compromise
- Requesting a Collection Due Process hearing
- Applying for an installment agreement
- Living abroad
- Military deferments
If the statute is paused (tolled), the extra time gets added to the end. That means while the lien is only active for 10 years, it’s not necessarily 10 consecutive years from the date you incurred the tax debt – due to various tolling events, it may expire 12 to 15 years after the debt was assessed, even though it was only active for 10 of those years.
The IRS may also refile the Notice of Federal Tax Lien before the lien expires to protect its interests. After the tax debt is paid in full or the tax debt cannot be enforced, the IRS issues a Certificate of Release within 30 days.
The Four Ways to Resolve a Federal Tax Lien
There are four main ways that the IRS allows taxpayers to address federal tax liens. Understanding these differences is critical, as the right option for you depends heavily on your specific circumstances and what you want to achieve.
| Resolution | What It Does | Best For | Removes Public Record? | Requires IRS Form? |
|---|---|---|---|---|
| Release | Satisfies the lien after full payment | Taxpayers who have paid or settled the debt | No – record remains | No – automatic |
| Withdrawal | Erases the public lien notice entirely | Taxpayers on qualifying direct debit payment plans, lien filed in error, or on request after release | Yes – best outcome | Yes – Form 12277 |
| Discharge | Removes lien from one specific property | Taxpayers needing to sell or refinance a single asset | Partial – one property only | Yes – Form 14135 |
| Subordination | Lets another creditor take priority over IRS | Taxpayers needing financing while lien is active | No | Yes – Form 14134 |
Lien Release
A lien release happens when the associated tax debt is paid in full or once the IRS can no longer legally collect on it. This happens after a taxpayer makes a lump sum payment, pays the tax debt off via a resolution option, or allows the tax debt to expire.
Note that a lien release doesn’t erase the public record of the lien; it just confirms that the IRS no longer claims an interest in your property.
Lien Withdrawal
This is often a preferable outcome for taxpayers. It removes the Notice of Federal Tax Lien entirely, so it’s as if that a lien never even existed. This can significantly help taxpayers who need to make large purchases or refinance their property.
The IRS may approve a withdrawal if the lien was filed in error, the taxpayer sets up a qualifying direct debit payment plan, or if the withdrawal benefits the taxpayer and the government. This last situation generally applies when withdrawal makes collection more likely.
Taxpayers have to request a withdrawal using IRS Form 12277. Tax lien withdrawal is often the ideal outcome for a taxpayer, since it erases both the government’s interest in their property and the Notice of Federal Tax Lien.
Lien Discharge
While the resolutions discussed so far have addressed the lien in its entirety, a lien discharge only applies to a specific piece of property. If the IRS grants a lien discharge, they remove the lien from one specific piece of property while leaving the lien in place against other assets.
This option is often suitable for those who want to sell a home, refinance their property, transfer real estate, or otherwise complete a transaction with one particular asset. For example, a taxpayer may want to sell their house in order to downgrade and pay off their tax debt. In this situation, granting the discharge would benefit the IRS, as it would make collection more likely. The IRS is also more likely to grant a discharge if the value of the remaining property under the lien is enough to cover the amount due.
Lien Subordination
Unlike other relief options, lien subordination does not remove the lien at all. It just allows another creditor to move ahead of the IRS in priority position. In general, the IRS gets first priority; with subordination, the IRS allows someone else to take that position.
Taxpayers may request this option if they need financing, but a lender will not work with them unless they get first-priority lien status. Subordination can be helpful if taxpayers want to refinance mortgages, secure business financing, access funds needed to pay off tax debt, or improve cash flow so they can put more towards their tax debt each month.
Each of these resolution options is useful in different scenarios and helps taxpayers achieve different outcomes. Find out which lien option applies to your situation.
Payment Options: Resolving the Underlying Tax Debt
Addressing the lien is just one part of the process. You also need to make arrangements to resolve the tax debt that led to the lien. The IRS’s main options include:
- Installment agreements – monthly payment on IRS tax debt, with flexible terms for up to 10 years or until the tax debt expires, if sooner. Terms may be shorter on certain types of business tax debts.
- Offer in compromise – settlement for less than you owed, based on your ability to pay. Work with a professional to improve success rates, as the IRS rejects the majority of applications.
- Currently not collectible – collections pause based on financial hardship. If approved, you don’t have to make payments unless your finances improve, but if they don’t, the tax debt could expire, meaning you won’t have to pay.
The IRS also offers penalty abatement in various situations, which can help reduce your total back taxes owed. Generally, you must file unfiled returns before you can set up payments or apply for a relief option.
What Happens If You Ignore a Tax Lien?
Ignoring a tax lien is perhaps the worst way to address this situation. The lien stays attached to your current assets, any new assets you obtain, and any rights to property. The longer you leave the issue unresolved, the more likely it is that the IRS will move forward with more aggressive collection efforts.
After sending LT11 or Letter 1058 and waiting out the 30-day warning period, the IRS may levy your assets. That may include garnishing your wages, freezing the funds in your bank account, or taking physical ownership of other assets.
Early action may give you more flexibility and provide you with more resolution opportunities.
Can You Sell Your House With a Tax Lien?
Yes, you can sell your house with a tax lien, but you typically need to address the lien before closing. It’s common for the IRS to receive proceeds from the sale up to the amount of the lien, and then the seller receives whatever is left. But that’s not necessarily a seamless process, especially if the sale proceeds don’t cover the value of the lien.
You typically have to get in touch with the IRS before the sale and get their permission to move forward. For example, say the tax lien is for $50,000. You’re selling your home for $400,000, but once you pay the mortgage company, there’s only $30,000 left. That goes to the IRS, and then they’ll have to discharge the lien for the remaining $20,000 so you can complete the sale.
This can complicate real estate transactions. Title companies often won’t allow property transfers to proceed as long as there are unresolved liens attached to the property.
For people dealing with an IRS lien on their house, coordination between the taxpayer, attorney, IRS, title company, and lender is crucial. You should address this situation with your lender and tax attorney prior to the sale so you can make a plan well in advance.
Tax Network USA, Inc. works with taxpayers and real estate professionals to coordinate lien discharge requests and other strategies when a lien is involved in a property sale.
Frequently Asked Questions
What is the difference between a tax lien and tax levy?
A tax lien is the government’s legal claim against your property, while a levy is the actual seizure of that property. For example, wage garnishments and taking the funds in your bank accounts are the two most common types of IRS levies.
Can I get a mortgage with a federal tax lien?
Possibly, but you’ll need to jump through some hoops. Lenders often require the lien to be resolved, subordinated, or otherwise addressed before they approve financing. They need to be in the first-priority lien position. Also, you’ll need to set up payments on the underlying tax debt, and those payments will factor into your debt-to-income ratio.
How do I remove a tax lien?
Solutions include lien release, withdrawal, discharge, or subordination. Contact a tax professional for help.
Does paying off the tax debt remove the lien?
Paying the debt typically results in a lien release within 30 days, but that does not automatically erase the public filing record.
Can the IRS take my house because of a lien?
Generally, the IRS only seizes personal homes in very extreme situations, but they have the legal right to do so anytime you owe more than $5,000 in unresolved tax debt.
What is the best way to get rid of a federal tax lien?
Working with a tax lien attorney can help you determine whether release, withdrawal, discharge, or subordination is the best option for you. It all depends on your financial condition, what you want to do with the property that has a lien attached to it, and if you qualify for relief options.
A Tax Lien is Serious, But It Is Also Solvable
The team at Tax Network USA, Inc. has helped many taxpayers like you address the confusion and challenges that liens create. We help you handle both the lien itself and the underlying tax debt. Schedule your free and confidential consultation now – contact us online or call us at 1-855-225-1040. Learn how our services can help you save on tax debt.
