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What You Need to Know About Tax Liens and Levies

What You Need to Know About Tax Liens and Levies

Failure to pay federal income tax can have serious repercussions. Not only will the IRS likely charge you fines and interest on the unpaid balance, but the IRS may also enforce collection with a tax levy or tax lien. Let's review what a tax lien and tax levy is, how they work, and what you can do if faced with one.

What is a tax lien?

A tax lien is a federal government lawsuit against your property. The IRS can provide a tax lien on your property if you neglect or implicitly refuse to pay a full tax debt.

A tax lien does not require you to sell real estate to pay taxes. But it ensures that when you sell, the IRS is entitled to the proceeds as payment for any taxes owed.

Tax liens can affect any assets you own, including your home and other property, vehicles, and other personal property, including financial assets and any business property you own. It can also be attached to goods purchased after the IRS has issued the lien but before paying to settle it.

In simpler terms, a tax lien is the last resort used to secure the payment of personal or corporate taxes.

When the IRS sends you an invoice, but you neglect or refuse to pay it, it sends you Letter 3172, Notice of Federal Tax Lien Filing, and your rights to a hearing under IRS 6320. If you do not agree to the lien, you have 30 days from the letter's date to request an appeal. Instructions for requesting an appeal are usually included in the letter.

If you miss the deadline to appeal, you can file a Form 12153 request at an equivalent hearing. But this type of hearing does not block the tax levy, suspend the ten years that the IRS must try to collect your debts or allow you to go to court to appeal any decision by the IRS board of appeal.

How does a tax lien affect me?

The IRS files the federal tax lien notice with local government authorities, such as the secretary of state or the county registry office, where you live, do business, or own property. The lien does not specify which properties are affected; it automatically applies to all real and personal property and all future assets you may purchase during the lien period.

Plus, it can affect your ability to sell or refinance your property and run your business because it applies to all of your assets. Also, in many cases, a federal tax lien cannot be discharged in the event of bankruptcy.

Tax liens do not affect your credit.

There is good news regarding tax liens. Previously, credit bureaus included tax liens on credit reports, which could hurt credit scores. But in 2017, Equifax, Experian, and TransUnion (the three major consumer credit bureaus) changed some of the public record rules they include on credit reports.

The National Consumer Assistance Plan, launched by the three credit bureaus, has eliminated the inclusion of debt credit reports of debts that do not arise with a consumer entering an agreement to pay or contract. As a result, debts such as fines, traffic tickets, or tax liens no longer show up on credit reports.

What the IRS can do

In the United States, the IRS may place a lien on the taxpayer's home, vehicle, and bank accounts if the federal tax payment is delayed and no effort to pay the tax due has been demonstrated.

The federal tax lien takes precedence over all claims of other creditors. It is also difficult for the taxpayer to sell the property or obtain loans.

The only way out of a federal tax lien is to pay all of the tax owed or enter into an agreement with the IRS.

Before the changes made by the National Consumer Assistance Plan, once the lien is filed, it will appear in the taxpayer's credit report, affecting the person's credit score. It also prevents the taxpayer from selling or refinancing preferred assets.

The lien will remain in force until the end of the tax collection or until the status of limitation expiry.

What is a tax levy?

The next step after a lien is usually a federal tax levy.

As soon as the government's interest in your property is secured, the government can repossess or confiscate your property as a means of collection. The Internal Revenue Service is known for issuing levies on wages and bank accounts if they do not hear from the taxpayer on time or if the requested documents are not received. 

It is important to understand that a tax level is different from a tax lien. A tax lien gives the IRS the power to file a claim against your assets. For example, if you have to pay taxes and put your house up for sale, there is a guarantee that the IRS is the first to claim income from your house's sale.

A levy is a separate action by which the government confiscates your property or assets to pay off an unpaid tax debt. For example, the IRS can levy your bank account by taking the amount needed to pay off your tax debt. It doesn't matter if you use your account's money to pay off your mortgage or your car payment. Thanks to a federal tax level, the IRS has the right to seize your funds to pay what you owe before anyone else's claim.

How do I know if I have a tax levy or lien?

Tax levies and liens are serious problems, but they do not arise out of the blue. The IRS will not issue it without notifying you first.

The IRS sends out a payment request and then emails the Federal Tax lien notification after filing the lien. If your account is not paid and no other arrangement has been made, the IRS will send you a notice of intent to levy and a notice of your right to a hearing. Despite these notifications, it is not uncommon for taxpayers to have an active levy or lien and be unaware of it because the notification was sent to an old address or lost in the mail.

Taxpayers sometimes find out of tax lien when they try to refinance or sell a house. While an existing tax lien can be discovered during a title search or visit to the county registry, the best way to determine if an IRS tax lien has been filed is to check with the IRS.

If you owe IRS taxes and have not made other arrangements to meet your debt, it may help to verify that you are not subject to a federal tax lien. You can find out by authorizing your tax professional to call the IRS lien office on your behalf or by calling the IRS central lien unit at 1-800-913-6050.

In addition to federal liens and levies, you may also be subject to state or local liens and levies. Your secretary of state's office, as well as the county registry office, is a great place to start when looking for state or local liens.

How to get out of a tax lien

The easiest way to get rid of federal tax lien is to pay the taxes you owe. However, if this is not possible, there are other ways to manage collateral damages with the IRS's cooperation.

  • The IRS will consider discharging a tax lien if the taxpayer agrees to an automatic monthly payment plan until the debt is paid.

  • The taxpayer can discharge a certain asset, effectively removing it from the lien. Not all taxpayers or properties are eligible for discharge. IRS Pub 783 details the rules for discharging property.

  • Subordination does not take the lien off a property but sometimes makes it easier for the taxpayer to get another mortgage or loan. IRS Form 14134 is used to request this action.

  • Another process, a notice of withdrawal, removes the public notice of the federal tax lien. The taxpayer remains responsible for the debt, but the IRS does not compete with any other creditor for the debtor's property upon withdrawal. Form 12277 is used for this application.

If the tax repayment is simply not possible, the taxpayer should pay off as much debt as possible and seek dismissal of the balance from a bankruptcy court.

Final Words

If you are unable to pay off your tax debt in full, don't ignore the situation. Respond immediately to any letter you receive from the IRS. Try to find a payment plan as it can help you avoid a federal lien or levy, although you may have to pay interest and possibly fines.

If you face a tax lien or levy, a tax professional can help you dispute a tax lien filed in error or help you create an effective course of action to solve your tax problems and get on with your life.



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