What is a tax lien? Read on to know and understand what this government claim is all about to give you a better idea what to do in case you face it.
In this article:
- Definition
- How Will You Know You Have a Tax Lien?
- How Does a Tax Lien Affect Your Credit Report?
- What Property Is Subject to an IRS Lien?
- Can You Settle a Tax Lien?
- How Can You Avoid a Tax Lien?
- Why Did IRS File a Tax Lien on Your Property?
- What Is the Difference Between a Tax Levy and a Tax Lien?
- What Is a Tax Lien Certificate?
- Who Can Participate in the Tax Lien Certificate Auction?
- What Is a Tax Lien Investment?
- What Is Tax Lien Redemption?
What Is a Tax Lien? | Everything You Need to Know
Definition
What is a tax lien? A tax lien is a government claim on a taxpayer’s property or asset. IRS places this claim on a taxpayer who failed to pay taxes they owed.
This does not entail that authorities will get your property. It only ensures the government will get priority access to your assets over other creditors.
The lien will remain until the taxpayer can pay off the balance due, the limitations’ statute on the debt expires, or the taxpayer meets the requirements of the IRS Fresh Start Initiative.
How Will You Know You Have a Tax Lien?
Part of understanding what a tax lien is finding out if you have it. Given that you have not paid the government what you owe, the IRS will first review your tax liability and demand payment.
The government will give you 10 days to pay your balance due. If they do not receive any payment from you, they will notify you about the federal tax lien.
They may send you the Notice of Federal Tax Lien in the mail after they file the tax lien or may also call you over the phone.
How Does a Tax Lien Affect Your Credit Report?
A federal lien significantly impacts a taxpayer’s credit report. Once the IRS files the lien, they will notify all your creditors and will have the claim on your property before your creditors.
This situation makes it difficult for a taxpayer to borrow money from creditors in the future because the lien shows up on your credit report for creditors to see.
The IRS has stated that taxpayers who pay off their debt can request to remove the tax lien from their credit report.
Aside from that, taxpayers who owe less than $25,000 and set up an agreement for direct debit installments may also request for the removal of the lien from their credit report if they successfully pay off their debt.
What Property Is Subject to an IRS Lien?
The IRS can place a tax lien on all of the properties a taxpayer has, including any future acquired property. The rules for what it covers are very broad and can include pretty much everything, tangible or intangible assets.
Can You Settle a Tax Lien?
Yes, a taxpayer can definitely settle a tax lien. The IRS only requires you to settle your balance, so they can release the lien.
You can settle it if the government approves a bond for the payment of the debt, the limitations’ statute expires on the tax debt, you settle with an offer in compromise, or you pay your taxes in full.
How Can You Avoid a Tax Lien?
There is no other way to avoid a tax lien than staying in full compliance with the tax law.
If you think you cannot pay your taxes, contact the IRS immediately.
They will provide you with payment options to help you pay what you owe. Avoiding your liability or not taking immediate action when you receive the lien notice may result in a bigger problem.
RELATED: How To Deal With A Federal Tax Lien And Prevent It From Happening
Why Did the IRS File a Tax Lien on Your Property?
The primary reason for the government in filing a tax lien on your asset is because of your unpaid income taxes. The IRS will file a tax lien if a taxpayer owes $10,000 or more.
The government understands that those who were not able to pay their income taxes have their personal reasons. If the IRS finds that a taxpayer shows an unwillingness to pay what they owe though, they will definitely place a lien on your property to make sure you settle your debt.
What Is the Difference Between a Tax Levy and a Tax Lien?
A tax lien is the “invisible” government claim on your property, given that a taxpayer was not able to pay income taxes. A tax levy is the actual seizure of a taxpayer’s property.
With the tax levy on, the IRS can seize the taxpayer’s physical property, garnish wages, and even take money from a taxpayer’s bank accounts.
What Is a Tax Lien Certificate?
A tax lien certificate is a certificate of claim against a taxpayer’s property where a tax lien is present. Every time a taxpayer fails to pay property taxes or paid late on property taxes, the local government issues a tax lien certificate.
The local government sells tax lien certificates to investors through an auction. If an investor buys a tax lien certificate, they will pay the tax debt on behalf of the owner of the property tax.
Who Can Participate in the Tax Lien Certificate Auction?
Anybody can participate in the tax lien certificate auction, but one must register first with the local treasurer’s office. The interested bidder or buyer can only get a number for the auction by filling out the bidder application form.
Aside from that, a bidder must also submit an IRS form (W-9) for the purpose of interest reporting. The treasurer’s office requires a bidder’s tax ID number, email address, current phone number, mailing address, the name of a contact person, and their legal name.
What Is a Tax Lien Investment?
One investment niche that investors can take advantage of is a property tax lien. It can be risky, but investors can get excellent returns if done the right way.
This investment is simply buying tax lien certificates from municipalities that sell them. Investors can purchase the certificates for as little as a few hundred dollars for small properties.
What Is Tax Lien Redemption?
One important thing an investor must remember in investing in property tax liens is the redemption. Tax lien redemption means the owner of the property has to pay off the equal amount of the tax lien plus penalties and interest to the investor.
If the homeowner is not able to pay the debt within the redemption period, the investor can foreclose on the property. The investor must be aware of the rules for the redemption period as it varies from state-to-state.
Learn more about IRS tax liens in this video from Tax Lien Certificate School:
With these frequently asked questions about what a tax lien is, you have a broader understanding of what to expect from this government claim. You can only avoid tax liens if you pay your income taxes on time and do not neglect them.
In case you find it difficult to pay what you owe, contact the IRS immediately to know how you can settle your debt with less stress.
What difficulties have you faced in dealing with tax liens? Share your experiences in the comments section.
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