What Is a Tax Lien?

Tax Liens: How to Find Out If You Have a Tax Lien and How to Remove Them

When you owe back taxes, the IRS may issue a tax lien against you. If you’ve received a letter threatening a tax lien, you may be wondering what that means. Similarly, if the IRS has sent you a Notice of Tax Lien, you’re probably wondering what you should do. Here’s what you need to know.

What is a Tax Lien or Notice of Federal Tax Lien?

A tax lien is a legal claim to your assets that the IRS issues when you owe back taxes. Once the IRS files a notice of federal tax lien, this lien attaches itself to just about all of your assets. A tax lien gives the IRS the right to this property, and if you try to sell any of the property, the IRS has the authority to take the money, or its cut to pay the back taxes owed plus interest and penalties.

A tax lien is similar to when you buy a home with a mortgage — the bank has a lien on your property, and if you don’t repay your loan, the bank has a right to take your home. Similarly, if you sell your home when you have the lien in place, you don’t get to pocket the money from the sale. First, you have to pay the mortgage holder. A federal tax lien works the same way. 

Assets Affected by Federal Tax Liens

A federal tax lien will attach to all of your assets as well as future assets that are acquired while the lien is in place. The notice of federal tax lien keeps the wording vague to ensure that the lien covers anything that can be of value that you own. There is no complete list published of what the lien can include, but below are some common assets covered by the lien.

• Homes (residences, vacation homes, rental homes)
• Future homes purchased while the lien is active
• Cars, trucks, motorcycles, & any other mode of transportation
• Investment income (including rental income, annuities & more)
• Jewelry and other personal effects that have value
• Accounts receivable
• Stocks, bonds, mutual funds & any other type of security

Can You Sell Your House With an IRS Tax Lien?

If there is a lien against your home, the lien will show up when the buyer does a title search. The lien doesn’t mean that you can’t sell your home, but it means that the IRS has a right to the proceeds.

If you have a mortgage on the home, the mortgage lender has first “dibs” on the money from the sale. Once they have been paid, the IRS is second in line. Depending on how much you sell the home for and how much you owe, you may end up with nothing. If the sale of your home doesn’t cover your full tax bill, you may even still owe back taxes after you sell your home. 

How Long Do IRS Tax Liens Last?

Generally, tax liens last until the collection statute expires. The IRS has 10 years to collect on a tax bill. So, if the IRS issues the lien right when you become delinquent, the lien should last for 10 years. 

What is a State Tax Lien or State Warrant?

Most state tax liens work similarly to an IRS lien. However, they all have their own set of rules when it comes to tax amounts due and when the state will file a lien. Many state tax liens last longer than IRS liens. For instance, while most IRS tax liens expire within 10 years, there are some states where tax liens last for 20 years. 

States also use various names for liens, one common term is a tax warrant which is the equivalent of a tax lien. Each state also has its own rules on how they can be released, removed, discharged, or subordinated.

How to Remove an IRS Tax Lien

To remove an IRS tax lien, you can pay the balance in full or prove that the lien is causing you financial hardship. You can also get the lien removed if you prove that the IRS made a mistake while issuing the lien. Check out this resource for more lien removal strategies.

Are IRS Tax Liens Public Record?

Yes, IRS tax liens are public records. There is a public record of the tax lien with the Secretary of State or the county clerk’s office. Anyone has the right to see these liens. They are not private information. 

In particular, if you apply to take out a loan, your creditors may see the lien. If you try to sell a property, the buyer will see that there is a lien when they do a title search on the property. If you apply for a job where you need to establish fiscal responsibility, your prospective employer will likely see the lien.

What is the Difference Between a Tax Lien & a Tax Levy?

Liens and levies are quite different and confused by many. A tax lien, either a state tax lien or federal tax lien, is a legal claim against your property that helps to secure payment of back taxes owed. The lien means that the tax agency has a legal claim to the assets, but it doesn’t mean they are immediately intent on seizing your assets.

A tax levy is the actual seizure of your property to satisfy the back tax amount owed. A levy can come in many forms, the most general being wage garnishment and bank account levies. But it can also include seizing your property and selling it at auction. 

Most of the time, the tax authorities file a lien before they levy. When they file a lien, it doesn’t mean that there will be a levy, but if action is not taken by the taxpayer to resolve the back taxes due, then it is likely the tax authorities will eventually levy.

Tax Lien Filing Process

If you owe back taxes and don’t pay them, the IRS may issue a tax lien. Typically, the agency only issues tax liens when your back tax due is $10,000 or more, but there are some exceptions. Before issuing a tax lien, the IRS must:

• Assess your tax liability. Either by the taxpayer filing a return or the IRS filing a substitute return or assessing tax in an audit.
• Send you a demand letter, and give you 10 days to make arrangements.

Then, the taxpayer must not pay the bill or make any other arrangements to deal with the tax debt. Once these elements are in place, the IRS can file a tax lien with a local county recorder of deeds or the Secretary of State.

Effect of an IRS Tax Lien

When the IRS issues a tax lien, your creditors get notified. On secured loans, the IRS’s claim to your assets doesn’t supersede your creditor’s claim to your assets. For instance, if you have a car loan, your lender has “first dibs” on your car, but the IRS has the right to any remaining value.

However, the tax lien does take priority over your unsecured liability such as credit cards. To explain, if you declared bankruptcy and had to sell your assets to pay your liabilities, the secured lenders would be paid first, the IRS second, and the other creditors third.

Your creditors don’t like this news. Once your creditors receive notice of your tax lien, they start to see you as a risk, and they get worried that you might not pay your bills. As a result, they may increase your interest rate. If you have credit cards or lines of credit, they may also reduce your credit limit.

Tax Lien Subordination

Tax liens can also make it impossible to get loans against your assets. If a lender sees that the IRS already has a lien against your asset, they won’t let you use that asset as collateral. However, in this situation, you can ask the IRS to subordinate your lien. This just means that the IRS agrees to take second priority behind the other creditor. Typically, the IRS will only do this if you use the loan proceeds to pay off your tax debt, or if you convince the IRS that subordinating its lien will help you pay off your debt faster. For instance, this may apply if you refinance your home to lower your monthly payments, and that allows you to make bigger monthly payments to the IRS.

Tax Lien WIthdrawal

A tax lien withdrawal will remove a previously filed Notice of Federal Tax Lien by the IRS. Taxpayers can file IRS Form 12277 to request the withdrawal of the tax lien formally. This form allows taxpayers to state their case for the lien removal, generally after settling their taxes owed or meeting specific eligibility requirements outlined by the IRS. Withdrawing a tax lien can significantly improve the taxpayer’s ability to obtain credit.

Do Tax Liens Affect Your Credit Score?

Traditionally, tax liens appear on your credit report. That can lower your score and make it virtually impossible to get loans. However, as of April 2018, all three credit reporting bureaus have decided to remove all tax liens from credit reports. This means that most tax liens don’t have a direct impact on your credit score, but they can make it hard to get loans. Your lenders can still search for public records of liens.

For example, if you’re trying to buy a home and you have a tax lien, most mortgage lenders won’t work with you until you take care of the lien by paying your back taxes. 

How to Find Out if You Have A Tax Lien

Before issuing a tax lien, the IRS has to send a letter. Usually, when the IRS files a notice of federal tax lien, you will receive IRS letter 3172. You will also receive a copy of 668Y, which is a copy of the actual notice of federal tax lien. 

But if you didn’t receive a letter, there are other ways to find out if you have a tax lien. You can call the IRS directly.  You can also visit your Secretary of State’s website. Then, look for something that says “UCC search” or “lien filings.” If you don’t see either of those options on the homepage, look at the site menu, or do a Google search for “Secretary of State [your state] lien search.”

In most cases, that should bring up the link you need. Once you find the right page, you can do a simple search for liens, just by entering your full name. You can also search based on a document number and a few other details.

Alternatively, to check for liens, you can contact the county clerk and recorder’s office. Keep in mind that the IRS likely filed a lien in the county of your latest address. If you’ve recently moved, check in the last county you lived. To find contact information for your area, search “county recorder [your county].”

You can also find liens using legal research databases such as LexisNexis. However, there is a charge for these services, and with so many free options, there’s no need to pay for information.

What If There Is a Tax Lien Against a Deceased Person’s Assets?

When someone dies, the executor of their estate is responsible for paying their unpaid taxes out of the estate. Once they pay in full, the IRS should remove the tax lien. If they need to sell the deceased person’s assets to pay the back taxes, the proceeds from the sale will go to the IRS (up to the amount of the tax liability plus penalties and interest). However, if the proceeds of the sale aren’t going to fully satisfy the lien, the estate executor or other authorized party should request a lien discharge before selling the assets. 

How Do I Contact the IRS About a Tax Lien?

You can call the IRS if you want to find out if there is a lien against you. The number for the centralized lien department is 1-800-913-6050. Expect long wait times, and make sure you have a copy of your last return to verify your identity. Alternatively, you can call the number that is on the last notice you received. 

Appealing a Tax Lien

If you don’t agree with the tax lien, you can appeal. There are a few different ways to appeal your tax lien, and the right option depends on when the lien was placed and why you’re appealing. If you already paid your tax bill or if the IRS made a mistake, you should appeal.

You can also appeal if your spouse is exclusively responsible for the back taxes due or in a few other situations. Once you appeal, you usually handle the rest of the process through the mail or over the phone, but in some cases, you may qualify for a face-to-face hearing.

The law requires that the IRS notify you when they file a Notice of Federal Tax Lien for each tax and period that you owe. You will have 30 days to request a hearing with appeals. On the lien notice, it will provide a day when the 30-day period expires. There are two main methods to appeal.

• Collection Due Process (CDP):  This is generally the slower method of appeals, but gives you a bit more flexibility if you don’t agree with the outcome. This type of appeal can be contested in the United States Tax Court.
• Collection Appeals Program (CAP): This appeal method is generally quicker than using the CDP option. With a CAP hearing, it is available before or after a notice of federal tax lien is filed. With this type of appeal, you cannot appeal to the Tax Court. The decision in a CAP hearing is binding to the taxpayer and the IRS.