IRS Tax Liens

Key Takeaways

• • An IRS tax lien is the IRS’s legal claim on your property. This helps secure payment for unpaid taxes and has an impact on all current and future assets.
  • Tax liens can limit your ability to sell, refinance, or borrow against your property. Tax liens no longer show on credit reports; however, they are filed publicly so creditors can easily obtain records of liens.

• The IRS may address a line through payment in full, payment plans, or by taking actions such as withdrawal, discharge, or subordination to modify its impact. 

• Ignoring a tax lien can escalate to a levy, where the IRS seizes assets to cover the debts.
• A tax attorney can help you protect your assets, navigate IRS procedures, and explore the various resolution strategies that would suit your needs the best.

What is an IRS Tax Lien?

A lien is the government’s legal claim against all of the property you own. When the IRS issues a tax lien, they aren’t physically taking or seizing the property, but they are staking their claim. 

The IRS files a Notice of Federal Tax Lien, often shortened to NFTL, to notify creditors that the government has a stake in your property. A tax lien also lays the legal groundwork for the IRS to seize your assets through a levy.

How a Lien Affects You

While an NFTL does not directly impact your credit score or show up on your credit report, it can affect your ability to get credit. Tax liens are publicly accessible, and creditors often recognize that someone with a tax lien may not be in the best financial standing, thus leading to a denial of credit. 

If you attempt to use your assets in certain ways after a lien is placed, you may be unable to do so. For example, if you want to get a home equity line of credit to repair your home or pay off tax debt, the lien will likely make it impossible for you to do so. A lender is not going to lend you money against your home if they know that the IRS already has a claim to the value of the home. 

Assets Subject to Liens

A lien asserts the government’s interest in all of your property, including your financial assets, real estate, and personal property. This includes everything from your personal home and vehicles to your bank accounts and business assets. Not only does the lien cover everything you own at the time the lien is placed, but it also includes everything you take possession of afterward until the lien is handled.

For example, say that the IRS issues a tax lien in 2024 for $50,000. At the time, you don’t have any significant assets. However, the following year in 2025, you receive a vehicle as a gift and you inherit a home. The lien attaches to both of those assets.

Exempt Assets

The IRS is not held to the same requirements as other creditors. Per the Internal Revenue Code, no property or property rights are exempt from a Notice of Federal Tax Lien. The IRC goes on to note that a state’s laws exempting certain property from creditors do not protect that same property from a federal tax lien.

However, you can take a little solace from the fact that many assets are exempt from IRS levies. In other words, the IRS can issue a lien against all of your assets, but there are certain assets the agency cannot legally seize. 

In particular, the IRS cannot levy (seize) income needed to cover essential expenses, certain disability or public assistance payments, tools of the trade, personal effects up to a certain value, worker’s compensation, court-ordered child support, and a few other essentials. Your home is exempt from seizure if you owe less than $5,000, but if you owe over that amount, the IRS can seize your home in certain situations.

Key Differences Between a Lien and Levy

When people talk about serious tax collection efforts, liens and levies are often lumped into the same category. Both indicate a significant tax problem, as they involve the government’s right to your property. However, a lien simply asserts that the government has a right to your property. A levy involves the government actually seizing said property and using it to pay off your tax debt.

Lien Timeline

A lien should not be unexpected—the IRS goes through an entire list of notices and letters before it actually moves forward with placing a lien on your property. Each notice gives you several weeks to respond, which means that several months pass between the first notice and the lien being filed. This is why it’s so important to work with a tax attorney as early as possible after realizing you are unable to pay your tax debt. 

The sooner you take action, the more options you have available to you—and the less likely you are to have a lien placed on your property.

Before the IRS files the Notice of Federal Tax Lien, they generally send several notices to remind you of your tax debt. Watch for these notices in the months leading up to a lien:

• CP14: This is the first correspondence you’ll receive from the IRS. It simply includes the amount you owe, notifies you that you have an outstanding balance, and gives you options to pay. You may receive this because you haven’t paid taxes after filing a tax return or because you didn’t file a tax return and the IRS has calculated what they believe you owe. Either way, responding and taking action at this step can protect you from letting the issue go any further.
• CP501: If you do not respond to the CP14 by the date listed on the notice, they may follow up with CP501. This is considered your first reminder of your tax debt. The notice includes information on how much you owe, your payment options, and what may happen if you do not pay your taxes.
• CP503: CP503 is the second official reminder of your tax debt. This is a bit more urgent than the last one, but still gives you a few weeks to respond.
• CP504: This notice is more urgent and, if not responded to, will allow the IRS to redirect some payments like state tax refunds toward your federal tax liability.
• CP90/LT11/LT1058: All three of these notices satisfy the IRS’s legal requirement to give you a 30-day warning that they plan to levy your assets if you do not pay your taxes in full. Once you reach this stage, you have a matter of weeks left before the IRS can seize your property, and you must take immediate action.

How to Handle a Lien

Whether the IRS has already placed a lien on your property or you know a lien is coming soon if you don’t take action, you have options. The earlier you act, the more options you have—and the less money you lose to penalties and interest.

Preventing a Lien

The best way to get out of a lien is to address your tax debt head-on before the IRS gets that far in the process. While their notices may make it seem like your only option is to pay in full immediately, that’s not exactly the case. This is the best option if you’re able to do so—you avoid spending more on penalties and interest. However, if you cannot pay in full, you can also look into these options:

• Installment agreement
• Partial payment installment agreement
• Offer in compromise
• Currently not collectible

Releasing a Lien

If the IRS has already placed a lien on your property, they release it after you pay your tax debt in full. The lien should be released within 30 days of payment being received.

Appealing a Lien

You may believe that the IRS placed a lien in error or in violation of their policies. You may be able to appeal the decision with Form 9423, a Collection Appeal Request. You can also request a Collection Due Process hearing with Form 12153. Move quickly if you want to go this route, as you have a limited timeframe. Missing the deadline means giving up your right to appeal.

Withdrawing a Lien

The IRS may withdraw their lien—remove the public Notice of Federal Tax Lien—in certain circumstances. You can request a withdrawal with Form 12277.

If you are seeking a withdrawal without paying off your unpaid taxes, you may get one by entering into a Direct Debit Installment Agreement. You must owe $25,000 or less, be on track to pay off your debt in 60 months or fewer, and be in compliance with all other filing and tax payment requirements.

Discharging a Lien

A NFTL applies to all property owned by a taxpayer. When the IRS discharges a lien, it removes the lien from one specific piece of property. There are various reasons the IRS may discharge a lien—they may do so if your property is worth twice as much as the taxes owed, you pay the interest on your lien, the property has no value, or you will pay off the tax debt by selling the property once the lien is discharged.

Subordinating a Lien

When the IRS places a lien on your property, it has priority over other creditors that have liens filed later. This can keep you from refinancing your property or tapping into equity. The IRS may agree to subordination if doing so makes it easy for you to pay off the tax debt. 

For example, taking out a home equity line of credit may allow you to pay off your tax debt, or refinancing a piece of property may decrease your monthly payments enough to allow you to make faster progress on your tax debt. Generally, however, mortgage lenders will only agree to a home equity loan or a refi if the IRS first agrees to subordinate its lien behind the lender’s lien.

When It’s Time to Talk to an Attorney

If the IRS is threatening to place a lien on your property, it’s time to reach out to a tax attorney. This is a significant step that can affect your ability to get credit, keep you from tapping into the equity of your property, and damage your reputation via a public tax lien notice. It’s especially important to reach out to a tax lawyer if you are confused about your payment options or feel overwhelmed by what the IRS is asking of you. 

Taking too long to make a decision or apply for assistance could leave you at risk of a lien or levy. A lawyer can walk you through different payment options, assess your finances, and explain the options that are available to you.

A tax lien can negatively affect your life in a variety of ways. The earlier you begin working toward paying off your tax debt, the quicker you can protect yourself from a lien. Find out how McLaud Law P.C. can help you get your tax debt under control. Call us at 585-397-7785 or request a consultation online.

Frequently Asked Questions

How does a federal tax lien affect my property?

A federal tax lien can limit your access to your property and your ability to use it. If you want to sell property, the IRS gets first dibs on the proceeds from the sale—and that’s if you can find a buyer who wants to purchase property with an IRS lien attached. You will likely also be unable to refinance the property or tap into its equity.

Can I protect certain assets from a lien?

No. The state laws that protect some assets from creditors and the federal laws that protect some assets from an IRS levy do not apply to IRS liens.

Who will know about the lien?

The lien is public information, so anyone who wants to look it up will be able to do so. This includes creditors, potential employers, and business partners. However, it does not appear on your credit report.

What’s the difference between a tax lien and a tax levy?

A lien simply stakes a claim on your property; a tax levy involves actually seizing the property.

Is a lien unavoidable if I cannot pay my tax debt in full?

No. You may be able to avoid a lien if you make payment arrangements with the IRS, which is why we recommend talking to a tax attorney as soon as possible if payment in full is not an option. If you are on an installment agreement or you are approved for another payment option, the IRS is unlikely to place a lien.

Does bankruptcy affect a tax lien?

No. A lien remains in place after bankruptcy. If you restructure your debt through Chapter 13 bankruptcy, you may pay off the debt and get the lien released.

What happens if I ignore a federal tax lien?

If you continue to ignore the IRS’s attempts at communication and make no effort to pay off your debt, they may move forward with a levy. At that point, you lose actual physical possession of your property.

Does a tax lien affect my credit?

No. Tax liens used to be included on your credit report and affect your credit score, but they no longer play a role in either. However, since they are publicly accessible, they can still affect your ability to get new credit if creditors look up tax liens.

Consult With a Tax Attorney Now

Whether the IRS has issued a lien or you’re worried about the potential of a tax lien, a tax attorney can help you. At McLaud Law P.C., we have decades of combined experience helping individuals and businesses deal with all kinds of tax problems including unpaid taxes, audits, assessments, and collection actions including liens. 

We can also help if you’re facing a state tax lien (called a Tax Warrant) from the New York Department of Taxation and Finance. To talk about the best solutions for your situation, contact us today. 

This communication is Attorney Advertising. It is presented for informational purposes only and does not constitute legal advice. Every legal situation is different, and prior results do not guarantee a similar outcome. This communication does not create an attorney-client relationship between McLaud Law P.C. and the recipient.