What Is a Federal Tax Lien?
An IRS tax lien is the IRS’s legal claim to your property — including bank accounts and real estate — if you have an unpaid federal tax debt.
Learn what an IRS tax lien is and how it affects taxpayers.
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What Is an IRS Tax Lien?
A federal tax lien is the IRS’s claim on a taxpayer’s property to satisfy a tax debt.
Note that, by law, the lien exists upon the IRS assessing a tax debt and notifying the taxpayer of its assessment; the government does not have to record the lien in order for it to have effect. Internal Revenue Code § 6321 says:
“If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.”
Of course, at this point — before the lien is recorded — nobody knows about it yet, so an unrecorded tax lien is sometimes referred to as a “secret” or “statutory” lien.
So when the IRS files a tax lien in various state and local jurisdictions, it is simply making its claim on the taxpayer’s assets (which already existed by law) public.
For example, shortly after a taxpayer files a tax return — or upon the completion of a substitute for return if the taxpayer has not filed their tax returns(s) — the IRS will assess the taxpayer’s tax liability.
If the liability goes unpaid, the IRS will send a notice demanding payment of the amount owed; at this moment, the IRS has a claim against the taxpayer’s property — a “secret” tax lien, as it were.
Of course, at this point, the IRS’ claim on the taxpayer’s property is a private matter — and the IRS will continue to send the taxpayer notices in an attempt to get them to pay their balance due.
If the taxpayer fails to pay their balance due or otherwise challenge or resolve their tax issues, the IRS will eventually file a Notice of Federal Tax Lien in the public record.
Note that unlike a levy, a lien is not considered by the IRS to be a “collection activity.”
For Your Information: IRS tax liens no longer appear on credit reports.
How an IRS Tax Lien Works
Taxpayers who receive more than a certain amount of income during the year — and that amount changes every year — are required to file a tax return for that year and likely has some tax liability to the federal government.
If a taxpayer does not pay their tax in full when they file their tax return, they will receive a bill from the IRS — typically a CP14 Notice — stating the amount they owe.
Of course, the taxpayer can challenge their tax debt, but if they fail to successfully challenge the amount of tax they owe or otherwise deal with the situation (such as through an offer in compromise), the IRS will take collection action against them for the amount of tax owed, plus penalties and interest.
A part of the IRS’ collection process is filing a tax lien against the taxpayer.
This tax lien is a legal claim, made by the federal government, stating that it has a right to the taxpayer’s current and future property until the taxpayer’s debt to the IRS is paid in full.
Tax liens are usually filed in a country recorder’s office or, in states that lack a county recording system, in the state’s secretary of state’s office.
And yes, the IRS does typically add the recording fee to your outstanding debt to them!
When the IRS records the line in county or state records, anybody searching the public records can see that you owe the IRS in the amount recorded on the lien.
While most people don’t go poking through these public records, some interested parties will. Probably the most obvious one is your mortgage company when you go to purchase a new home or refinance your existing home. A mortgage lender — at least a traditional one — will not want to be in second position on your property!
Lien vs. Levy
While a lien is a legal claim made by the IRS to seize your property to pay your tax debt, a levy is the actual seizing of your assets by the IRS to satisfy your tax debt.
While liens will likely negatively affect a taxpayer’s ability to obtain credit, levies are not public record.
How to Get Rid of a Federal Tax Lien
There are generally three ways to get rid of a federal tax lien:
Option 1: Pay the debt in full.
Perhaps the simplest way to get rid of a federal tax lien is to pay your tax debt — including not only the original tax liability but also the associated penalties, interest, and possibly recording fees — in full.
The IRS will release a taxpayer’s lien within 30 days after they have paid their debt to the IRS in full.
Let’s say you pay your balance to the IRS in full.
The IRS will then release your lien within 30 days.
Now this problem is behind you forever, right?
While the lien will not affect your credit score anymore — since it no longer exists — it will still show up on your credit report, which could be a red flag to potential creditors.
However, if you get the IRS to withdraw the lien using Form 12277, the IRS will essentially say, “We made a mistake by filing the lien” (even though they didn’t) — which will make your credit report look a lot better.
Option 2: Evade the IRS until the statute of limitations runs out.
The IRS cannot pursue a taxpayer for tax debts forever; there is a 10-year limitation on the length of time the IRS may pursue a taxpayer to collect their debt.
After these 10 years run out, the IRS no longer has the legal right to collect the debt and therefore no longer has the right to seize your property.
At this point, if the IRS does not release the lien, you may request that the IRS remove the lien from the public record.
Note that certain events may cause the limitation on the time the IRS has to collect a tax debt to extend beyond 10 years; learn more in our article on the IRS statute of limitations.
Option 3: Get the lien subordinated.
While only a temporary solution, lien subordination can help you reach financial goals that a publicly-filed federal tax lien would typically get in the way of.
When a lien is subordinated, the IRS is essentially agreeing, for all practical purposes, to put its own interest in a piece of property — such as a house securing a mortgage you are trying to refinance — behind another party’s interest — such as a bank’s or other lender’s.
This will obviously make a refinance or home purchase much more likely to be approved since the lender obviously does not want to be behind another party — especially the IRS — when it comes to loan positioning.
Taxpayers use Form 14134 to subordinate a federal tax lien.
Note that lien subordination is not a guarantee; there must be some basis for it.