Everyone has to pay taxes, and if you don't, taxing authorities have a special way to collect their debt. Tax liens are special legal provisions that give the IRS and other government entities priority in collecting taxes on income, real estate, or personal property. Fortunately, there are ways you can get rid of a tax lien, but time is often of the essence if you want to avoid worst-case scenarios like having your property levied and taken away from you.
What is a tax lien?
A tax lien gives the government a security interest in property that you have. This has the effect under creditor law of giving the government priority over other creditors. It also marks the first step toward a levy, in which your property is taken and sold in satisfaction of the debt.
As an example, take a look at how the IRS uses tax liens. Before imposing a lien, the IRS will send you a notice that assesses your tax liability and demands payment of taxes. If you fail to respond or don't pay off the tax in time, then a tax lien legally exists. At that point, the IRS will file a document called the notice of federal tax lien, which has the effect of notifying other creditors that there are unpaid taxes and that the federal government is asserting its priority in collecting taxes due.
Why are tax liens bad?
Having an outstanding tax lien causes several problems. First, a tax lien is a blemish on the title to your property. As a result, your ability to sell or otherwise transfer property is limited, as most buyers won't be willing to buy property subject to a tax lien until they have documented evidence that the lien is extinguished. Since a lien attaches to all assets, even the ability to do simple transactions, like making payments from a bank account, can be severely restricted. Even a bankruptcy filing doesn't eliminate federal tax liens, leaving you on the hook for paying the IRS.
In addition, a tax lien has a negative effect on your credit history, affecting your ability to get credit in the future. In many lenders' eyes, paying taxes is typically a first priority, and so if you've demonstrated a disregard with doing so, they're less likely to believe that you'll pay off ordinary loans in a timely manner.
Finally, if you don't get rid of the tax lien, the taxing authority typically has the ability to levy your property. For example, an IRS levy allows the federal government to garnish wages, take money in bank accounts, and even seize vehicles or real estate to satisfy tax debts.
How do I get rid of a tax lien?
Once a tax lien is in place, it's important to get it removed. The easiest way to do so, of course, is to pay your outstanding debt in full. Typically, the government taxing body will remove a tax lien relatively quickly after you pay your taxes, with the IRS claiming a 30-day window for release.
However, there are some more complicated steps you can take to have a lien removed. Under certain circumstances, the taxing authority will be willing either to allow the lien to be taken away from certain property or to withdraw its public notice of the lien. That can give you a chance to handle your credit more normally in order to take steps to sell assets and pay off debts, including your taxes.
Other times, the taxing authority might be willing to give another creditor higher priority in collecting debt. That can be helpful to avoid protracted legal battles in which creditors are fighting over your assets.
If you can't pay your taxes in full, then some taxing authorities will give you access to programs to try to come up with alternative arrangements. The IRS has the ability to agree to installment payment arrangements that in some cases will add up to less than the full amount of tax you owe. If you remain in compliance with the agreement for a set period of time, then at the end of that period, you can have your tax lien removed.
Tax liens are just one more thing that those who are in debt and can't pay their taxes have to deal with. But ignoring tax liens is never the right answer, because it puts your property at risk of being levied and sold. Only by working with taxing authorities can you successfully put tax liens behind you and start moving forward with your finances.