When a taxpayer has an unpaid tax debt that is past due, the IRS has the legal right to file a federal tax lien against the taxpayer’s property.
What is a Federal Tax Lien?
A federal tax lien is the government’s legal claim against the taxpayer’s property when the taxpayer neglects or fails to pay a tax debt. The lien protects the government’s interest in all the taxpayer’s property, including the taxpayer’s real estate, personal property and financial assets. In other words, any or all of your property becomes the property of the government up to the amount of the taxes plus any interest and penalties you owe the IRS.
How Will the Taxpayer Know if This is About to Happen?
The IRS will send the overdue taxpayer a bill, called a Notice and Demand for Payment, with the outstanding tax amount owed, 10 days before a lien is effective. At that point, the balance due has been put on the books and the IRS has assessed the taxpayer’s liability. If the taxpayer neglects or refuses to fully pay the debt in time, the IRS will file a public document, called a Notice of Federal Tax Lien, to alert creditors that the government has a legal right to the taxpayer’s property. The IRS will generally notify the taxpayer of the actual federal tax lien after it has already been filed.
How a Tax Lien Affects You
A lien on your property can be very frustrating, as it attaches to all of your assets (including any property you own, securities, vehicles), as well as any future assets you may acquire while the lien is still in place. It also attaches to all business property, including accounts receivable. A lien can also limit your ability to get credit; and if you file for bankruptcy, your tax debt, lien, and the Notice of Federal Tax Lien can continue after the bankruptcy. The lien enables the IRS to get paid when any property of yours is sold while a lien is in effect against it. The IRS is paid before you, the taxpayer, receive any money from the sale.
How Can You Prevent a Tax Lien?
A taxpayer can prevent a tax lien by paying the tax owed in full before the lien is filed by the IRS or by setting up either a guaranteed installment agreement (if you owe $10,000 or less) or a streamlined installment agreement (if you owe $25,000 or less) with the IRS. In order to be eligible for these agreements, you must not already have an installment agreement and your filings must be current. If the taxpayer owes more than $25,000, a lien can be avoided if the taxpayer pays the balance down to $25,000 or less and then establishes a streamlined installment agreement. You should never ignore any letter or notice that you may receive from the IRS. Always reply to the IRS in a timely manner, or enlist the help of a tax professional authorized to represent you before the IRS (e.g., an Enrolled Agent or a CPA).
When Will a Current Tax Lien be Removed?
A federal tax lien will be removed if:
- The lien was filed in error – for instance, the IRS may have the wrong taxpayer
- The outstanding balance has been paid in full
- An Offer in Compromise has been approved and satisfies the debt owed
- The lien has become unenforceable – this can happen if the lien has expired due to the 10-year statute of limitations
Peoples Tax has IRS Enrolled Agents and CPAs on staff and can assist you if you are dealing with a federal tax lien issue. We work with you and the IRS to come up with the best outcome for you. Give us a call at (804) 204-1040 or email us today to find out how we can assist you!
If you’re in Richmond, Virginia (RVA), we can meet at one of our RVA tax offices. If you are further away, we can handle your issues remotely by phone, email, Skype, our virtual portal and more!