Having the government interfere with your financial affairs is always stressful and unnecessary. You may be experiencing some financial difficulties or simply forgetting to pay your taxes. However, planning ahead for your taxes will help you avoid possible conflicts with the IRS down the road.
What is a Tax Lien?
When you fail to pay your taxes on time, the government seeks ways to protect its interest. A tax lien is a legal claim from the government against your property as a way to achieve this protection.
There are three main categories of tax liens: common-law liens, consensual liens, and statutory liens. The latter is created by the Internal Revenue Code. The federal tax lien is also referred to as a ‘general’, ‘secret’, or ‘silent’ lien.
There is no change of ownership, but merely the addition of a claim from the government on your assets. Nevertheless, they may sell the liens on your property to investors who can repay your debt. In return, the investors will have the right to collect the amount and interest from you.
How Does it Arise?
The IRS assesses your tax liability and contacts you when there is an outstanding tax balance. You receive a Notice and Demand for Payment letter explaining how much you owe in taxes and requesting you to settle the debt.
If you refuse or neglect to pay the said amount, the IRS files a lien on your property. They also file a Notice of Federal Tax Lien (NFTL) to notify creditors that the government has a legal claim on your property. The filing date of the notice is important in determining the priority of the IRS against other creditors.
Generally, the IRS collects the tax debt within 10 years. This timeframe can be extended in certain situations. In essence, the tax lien will continue to exist on your property until you either pay your debt or it becomes unenforceable due to a lapse of time.
What Can The IRS Put A Lien On?
The IRS has the power to attach a lien to all assets owned by the taxpayer in debt, both tangible (e.g. houses, cars, personal possessions) and intangible assets (e.g. rights to property).
The same goes for joint and shared properties. Although the IRS can attach a lien only on the portion owned by the person who has a tax debt, it still affects the other owner(s). A lien acts as a barrier to selling an asset or real estate.
Nevertheless, a tax lien cannot extend beyond the property and interest owned by a taxpayer in debt. An existing lien will automatically apply to a newly acquired property, either through purchase, inheritance, or any other means.
The Difference Between a Lien and a Levy
The two actions are tools the IRS uses to collect tax debts, though each has its own functionality. A lien secures the government’s claim on your property, while a levy legitimizes the government’s seizure of your property to cover the tax costs.
In a sense, a lien is given as a warning for the taxpayer to settle their debt. If that doesn’t happen, then the IRS has the right to seize and sell your property (after issuing a levy).
The process starts with the IRS sending out a Notice and Demand for Payment. It continues with a Notice of Intent to Levy, and a notice of your right to a Collection Due Process hearing. Overall, the IRS sends 5 letters (referred to as the collection notice stream), starting six weeks after your last return filing.
When you receive the last notice and don’t pay the tax debt, or make other arrangements, the IRS may seize your assets and access your bank accounts.
How to Avoid Liens and Levies
Pay Your Taxes!
It’s best to avoid receiving a lien or a levy rather than figuring out how to get rid of it. The easiest way to avoid any lien action is to pay your taxes. When you pay the full amount of your tax liability, the IRS will remove the lien within 30 days (though it can take longer). This process is referred to as a ‘discharge’.
In case you are unable to pay the full amount on time, you can select a different payment option to settle your tax debt. In any case, you must respond to any communication from the IRS to avoid losing control of your assets.
Extension or Suspension of the Collection Time
Another way to deal with liens is to ask for an extension of the collection period or even suspension. You can request an extension of up to 120 days to pay off the full balance of your debt. Alternatively, the IRS may allow you to pay with monthly installments if you’re unable to pay the full amount at once (with an IRS installment agreement).
Situations that allow for a collection time extension:
- When the statute of limitations and an installment agreement coincide. In such cases, the collection may take place 98 days after the expiration of the installment agreement.
- When there was an agreement to extend the statute of limitation at the same time as the levy’s release, and that date has not yet passed.
Reasons for suspending the collection time:
- Issuing a statutory notice of deficiency
- Extending the payment of an estate tax
- Your assets are under the custody of a court
- There was an unjustified lien or seizure of your property
- You have been outside the US for at least 6 months
- You filed for bankruptcy
When you demonstrate to the IRS that you have the intention to pay off your tax liabilities they will be more understanding. If you’re experiencing financial difficulties, they will offer you alternative options until you both come to an agreement.
When you are unable to pay any amount at all you can request a “currently not collectible status”. This will classify you as temporarily unable to pay taxes, avoiding any liens or levies on your property. Otherwise, you can apply for IRS tax lien relief or withdrawal if you meet specific qualifications (the IRS Fresh Start program).