What is a Tax Lien, How Does It Work & How to Stop One? 

In the stressful and complex world of taxation, one term that draws question marks is “tax lien.” These are severe problems for people struggling to pay their taxes, and understanding how they operate is critical to salvaging a financial reputation.

We’ll dive into how these warnings operate, the different types of liens, and what will happen if a tax lien is left unattended for too long. Hopefully, this post guides anyone struggling with this situation or reminds individuals to check the status of their lien records.

Definition of a Tax Lien

Tax liens are government claims on a property due to the owner’s failure to pay taxes. It acts as a security interest that gives the government the right to seize the property if the text debts aren’t addressed in time.

For example, if a homeowner doesn’t pay their taxes or municipal charges (sewer, water, etc.), the state may place a lien against the residence. If this lien isn’t taken care of within a set period, the home is seized to pay the debt.

The above situation, in which the entire home is confiscated, is quite extreme. It’s more likely that smaller measures are taken to satisfy the taxes. Or, when you sell the property, the IRS will cut into the profits.

Federal Tax Lien

Federal tax liens are placed by the Internal Revenue Service (IRS) for non-payment of income taxes. These liens can be placed against personal property or business assets if the company has back taxes.

A Federal tax lien comes into effect after the IRS assesses your liability and informs you of how much you owe. This communication is known as the “Notice and Demand for Payment.” The IRS also contacts creditors with a Notice of Federal Tax Lien, which alerts them that the government is legally claiming the debtor’s property.

Federal tax liens have a collection statute expiration date of 10 years. If your property hasn’t been levied in that time, the IRS loses its claim. However, there are many ways for the IRS to extend the expiration date without informing you, so waiting for the expiration date isn’t a viable strategy.

State Tax Lien

State tax liens operate nearly the same as their Federal counterparts. There are minor deviations between states, such as the expiration period, but those differences are typically inconsequential.

The most significant difference between Federal and State Tax lien is that a state tax agency cannot place or collect on a lien against property in another state. The agency must obtain a court judgment giving them jurisdiction in a matter across state lines.

What Are Tax Lien Certificates?

Some states and counties allow the buying and selling of tax liens to investors through tax lien certificates. The government body auctions these certificates to immediately collect part of the back tax rather than waiting for the debtor to set things right.

Regardless of the winning bid’s size, the awarded tax lien certificate is valued equally to the outstanding back taxes. An investor might bid $1,700 for a tax lien certificate against $2,500 of unpaid taxes. That investor would profit the remaining $800 plus accruing interest from the property owner’s payments.

The property owner is usually given a specified period to redeem the tax lien by paying all of the overdue taxes plus the accrued interest. Failure to redeem within the redemption period may result in the investor acquiring the property through a process known as tax deed sale.

How to Find Out if You Have A Tax Lien

Learning if you have a tax lien is vital to keeping your finances flexible and avoiding complications during property transactions. Creditors don’t automatically see tax liens like in the past, but they’re still public records and can affect your financial reputation.

Fortunately, several ways exist to check for tax liens against your property.

Official Notice

The IRS and State government must send out a lien notice updating you on the status of your back taxes. These documents are sent through the mail and are easy to miss, so it’s best to check through other means to be careful.

County Records Department

A more hands-on method is to contact your county records department. These locations manage public records related to property, including tax liens. You can visit their office in person, call for information, or check their online database if one is available.

Online Services

Navigating a government office is typically time-consuming due to long wait times. It may be better to work with online services like RecordFinder to hunt down your property liens.

Note: In the past, individuals could check for tax liens on their credit reports. However, the three major credit bureaus no longer include the information since tax liens can no longer damage your standing.

How to Get a Tax Lien Removed?

The difficulty of removing a tax lien depends on your situation and the severity of the owed taxes. It may take a while, but here are some steps that can eliminate or temper the problem:

Pay your Taxes

This is the most obvious method for removing a tax lien. However, generally, the only people with this option are those who forgot to pay their taxes or were misreported. Individuals who missed their payments for other reasons probably can’t immediately pay.

You can set up an installment plan if the lien is causing financial hardship. This option requires direct deposit from your bank account and comes with other stipulations, including:

• Less than $25,000 in back taxes
• The plan must conclude before the lien expires
• You haven’t defaulted on a previous payment agreement

Discharge of Property

An IRS discharge removes a lien from a specific property. This option doesn’t remove the lien entirely, as all your other property is still affected, but it allows you to sell the discharged property to settle your tax bill more efficiently.

You may also be eligible for a discharge of property if one of the other properties affected by the lien can cover double the tax liability.

Lien Subordination

A lien subordination means the IRS allows you to pay another creditor before them. This arrangement gives you many more choices, such as refinancing a loan to another creditor. The idea is that once your payment responsibilities decrease, you can make larger payments toward your taxes.

Keep Yourself Informed When It Comes to Tax Liens

Whether you’re faced with a federal or state tax lien or are exploring investment opportunities through lien certificates, being informed empowers individuals to make sound financial decisions.

The starting line is always to confirm if there’s an active lien on your property. It’s easy to miss official notices sent through snail mail; working with a service like RecordFinder is the quickest and most surefire way to locate your liens.