Tax lien. The words are scary, but also steeped in mystery. You probably know a tax lien is bad, but do you know exactly what it is?
A tax lien isn’t good, but it’s also not quite as awful as it souns. In fact, if you’ve received notice of an IRS tax lien on your property, you’re not alone. And, as far as threats from the Internal Revenue Service go, a tax levy should be far more disturbing.
A tax lien could have a very negative effect on your credit report, but you can mitigate the damage by taking a few smart steps. And Solvable.com can help.
Your Tax Lien Questions, Answered
So what is a tax lien? How is it different from a levy? And what should you do if you get an IRS tax lien on your house? What about other types of liens?
Relax, and let Solvable.com explain it all, giving you the knowledge to solve nearly any past-due tax situation (usually with the help of a tax professional, which we can also help you find).
What Is a Tax Lien?
A tax lien is simply a document issued by the IRS (or another organization) that represents “the government’s legal claim against your property when you neglect or fail to pay back taxes,” according to the IRS.gov website. A lien may be placed on your real estate, personal property, or other financial assets.
In short, this means that should you ever sell your property (typically, but not always, real estate) the IRS can collect the taxes owed before you see a dime of the money from the sale.
Who Can Issue Liens?
In addition to Federal tax liens, you can have liens filed against you by the state government for failing to pay state taxes or by your local government for failing to pay property taxes. You could also have a “super lien” if you fail to pay Homeowners’ Association Fees.
Tax pros say that local governments and associations are far more aggressive in collecting on liens—and turning liens into levies. If you owe local or state taxes, do whatever it takes to pay them right away.
“If you don’t pay your property taxes, that’s deadly. You’re going to lose your house,” says Rafael Castellanos, managing partner at Expert Title Insurance Agency LLC in New York, in an article published at U.S. News & World Report.
What Is a Tax Levy?
A tax levy, on the other hand, permits the IRS to seize your property—including real estate, personal property, or financial assets—to cover the taxes you owe.
If you have a levy on your property, speak to a tax attorney immediately for help. By acting quickly, you may be able to save everything you’ve worked so hard for.
What Happens When You Get a Tax Lien?
In either case, there’s no need to lie awake at night worrying. Neither a tax lien nor a tax levy will suddenly appear in your mailbox (or on your credit report) without warning. Unless you completely ignore the collection letters, you will know where you stand and have time to take action.
Before issuing a tax lien, the IRS or state or local government will:
If you don’t pay the bill, they will then issue a Notice of Tax Lien. This information goes on file in the county office and also on the credit reports issued by all three major credit bureaus (Experian, Equifax, and TransUnion).
A tax lien can have the same effect on your credit report as a bankruptcy or another major delinquency. Even if you pay the back taxes in full, a notice of tax lien could remain on your credit report for up to seven years. This can affect your ability to obtain other credit, including a mortgage or car loan.
A poor credit score may also affect your ability to rent an apartment, get a job, or to get the lowest rates for car insurance. That’s one reason it’s so important to take care of a tax lien right away.
What To Do About a Tax Lien After You Pay Your Tax Bill
If you receive notice of a tax lien and can pay the tax bill promptly, do so. Then enlist the help of a tax professional or credit repair agency to help you remove the tax lien from your credit reports.
The IRS has 30 days to release the lien and report that action to the credit bureaus. But this will only show the lien was released—it will still take seven years for it to drop off your credit report.
If you’ve paid the back taxes in full, a tax attorney or credit professional can help you request the IRS remove the public notice of the lien through a withdrawal. This video from the IRS website explains how to do it.
You are likely to qualify for a withdrawal if you’ve filed all individual and business tax forms on time for the past three years and are current on all your tax payments (including estimated quarterly taxes if you are self-employed).
How to Deal with a Tax Lien if You Can’t Pay Your Tax Bill in Full
Of course, if you had the money to pay your tax bill, you probably would have paid it when it was due and avoided this situation. Back taxes, unlike other debts, can remain on your credit reports indefinitely. So it’s always best to enlist the help of a tax professional and negotiate an agreement to take care of your back taxes as soon as possible.
To eliminate a tax lien if you can’t pay your taxes in full, you have a few options.
You can negotiate a direct debit installment agreement with the IRS, where you agree to pay your tax bill in monthly installments, to be paid in full within five years. Once you’ve made three consecutive, on-time debit payments, you may file for a withdrawal of your Notice of Federal Tax Lien. To qualify, you must owe less than $25,000 in back taxes, or be able to pay your back taxes down to $25,000 before negotiating an installment agreement.
Another option? You can file an offer-in-compromise, where the IRS agrees to settle your back taxes for an amount less than what you owe. If the IRS accepts your offer-in-compromise, [link to previous article] you can then file a withdrawal for your tax lien to clear your credit report and improve your credit score.
Following up with the Credit Bureaus
Whatever you do, make sure you follow up by requesting copies of all three of your credit reports to ensure the IRS has filed the withdrawal and the credit reporting bureaus have reflected that on your credit reports.
If there’s a mistake you may want to enlist the help of a credit agency to make sure all three credit bureaus report the lien withdrawal.
Other Options to Deal with a Federal Tax Lien
Taxpayers who cannot pay their back taxes in full within 60 months on a direct debit installment agreement have two other options:
You can file a discharge of property. This removes the lien from a specific property. For instance, if you have a primary residence and a vacation home, you may be able to remove the lien from your primary residence, allowing you to sell or re-finance that home. If you own a business or have income-producing rental properties or fix-and-flip investment homes, you may be able to have these properties discharged.
You can request “subordination.” Subordination puts other creditors ahead of the IRS in collections, which might make it easier for you to get approved for a home equity loan or second mortgage. You may be able to tap into your home’s equity to pay your back taxes.
Remember, though, these options may not necessarily resolve your tax problems, but could prevent the situation from getting worse.
Help (and Time) Is On Your Side
Fortunately for taxpayers in back taxes, the IRS is often slow to issue tax liens and is willing to negotiate with those who owe back taxes. There’s no reason to face the IRS on your own. Enlist the help of a tax attorney and a credit counseling agency to negotiate an agreement for your back taxes and ensure the tax lien is released and withdrawn, clearing your name and restoring your good credit.