There are nearly 10 million taxpayer delinquent accounts in the U.S. and for those who own their own home, the IRS may place a federal tax lien on the property to collect what you owe the government.

“If you’re in debt to the IRS, Uncle Sam can slap a tax lien on your home. A federal tax lien can make it difficult for you to sell your house, refinance the mortgage or get credit until the debt is paid,” says Bankrate. “A lien also attaches to other assets, including your money, vehicles, and any other property you own. If you’re a business owner, those assets may be included in the lien, too.”

While the number of federal tax liens has declined recently – the government filed 157,323 new tax liens on property in 2022, down from 212,251 in 2021 – it can be quite scary to get an IRS federal tax lien notice in the mail.

“If you have a big tax bill that you can’t pay, life can seem pretty bleak,” says CNBC. “Get realistic about your situation and don’t ignore the fact that something needs to be done. Depending on how much you owe, you may be able to deal with the IRS yourself, or you may need professional help.”

What is an IRS Tax Lien vs. a Tax Levy

An IRS lien on your home is different from a levy.

Taxpayers need to act when an IRS lien has been filed because they do not want their case to proceed to a tax levy.

“An IRS levy permits the legal seizure of your property to satisfy a tax debt. It can garnish wages, take money in your bank or other financial account, seize, and sell your vehicle(s), real estate, and other personal property,” says the IRS.

A lien is not a levy. A lien secures the government’s interest in your property when you don’t pay your tax debt.

“A federal tax lien is a legal claim to your property (such as real property, securities, and vehicles), including property that you acquire after the lien arises,” explains the U.S. Taxpayer Advocate. “If the IRS files a lien against your business, it attaches to all business property and all rights to business property, including accounts receivable.”

Taxpayers Who Fail to Act Could Face Property Seizure

What taxpayers do not want to do is not act at all after receiving notice of a federal tax lien.

“First and foremost, don’t ignore notices from the IRS. Even if you can’t pay the taxes you owe, responding to a notice before the due date could prevent a lot of trouble,” recommends the U.S. Taxpayer Advocate.

The reality is that there are very few seizures of property each year by the IRS, with fewer than 100 cases in the last report.

“The IRS doesn’t want to seize real estate because then they have to sell it to pay the taxes. It’s much easier for them when taxpayers pay their taxes in cash from the proceeds of a sale,” says Forbes.

What You Need to Know about Federal Tax Liens

A federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in all your property, including real estate, personal property, and financial assets. A federal tax lien exists after:

The IRS:

• Puts your balance due on the books (assesses your liability);
  
  
• Sends you a bill that explains how much you owe (Notice and Demand for Payment); and

You:

• Neglect or refuse to fully pay the debt in time.

The IRS files a public document, the Notice of Federal Tax Lien, to alert creditors that the government has a legal right to your property.

How to Get Rid of an IRS Lien

Paying your tax debt - in full - is the best way to get rid of a federal tax lien. The IRS releases your lien within 30 days after you have paid your tax debt.

When conditions are in the best interest of both the government and the taxpayer, other options for reducing the impact of a lien exist, such as:

• Discharge of property: A "discharge" removes the lien from a specific property. There are several Internal Revenue Code (IRC) provisions that determine eligibility.
  
  
• Subordination: "Subordination" does not remove the lien but allows other creditors to move ahead of the IRS, which may make it easier to get a loan or mortgage.
  
  
• Withdrawal: A "withdrawal" removes the public Notice of Federal Tax Lien and assures that the IRS is not competing with other creditors for your property; however, you are still liable for the amount due.

New Ways to Get a Tax Lien Withdrawal Since 2011

Since the IRS Commissioner’s 2011 Fresh Start initiative, there have been two additional Withdrawal options for IRS tax liens:

• One option may allow withdrawal of your Notice of Federal Tax Lien after the lien’s release. General eligibility includes:

o   Your tax liability has been satisfied and your lien has been released; also:

o   You comply for the past three years in filing - all individual returns, business returns, and information returns;

o   You are current on your estimated tax payments and federal tax deposits, as applicable.

• The other option may allow withdrawal of your Notice of Federal Tax Lien if you have entered into or converted your regular installment agreement to a Direct Debit installment agreement. General eligibility includes:

o   You are a qualifying taxpayer (i.e. individuals, businesses with income tax liability only, and out-of-business entities with any type of tax debt)

o   You owe $25,000 or less (If you owe more than $25,000, you may pay down the balance to $25,000 before requesting withdrawal of the Notice of Federal Tax Lien)

o   Your Direct Debit Installment Agreement must fully pay the amount you owe within 60 months or before the Collection Statute expires, whichever is earlier

o   You are in full compliance with other filing and payment requirements

o   You have made three consecutive direct debit payments

o   You can’t have defaulted on your current, or any previous, Direct Debit Installment agreement

How an IRS Lien Can Affect You

IRS liens on your property can affect you in various ways, including:

• Assets: A lien attaches to all of your assets (such as property, securities, and vehicles) and future assets acquired during the duration of the lien.
  
  
• Credit: Once the IRS files a Notice of Federal Tax Lien, it may limit your ability to get credit.
  
  
• Business: The lien attaches to all business property and all rights to business property, including accounts receivable.
  
  
• Bankruptcy: If you file for bankruptcy, your tax debt, lien, and Notice of Federal Tax Lien may continue after the bankruptcy.

The IRS says: “You can avoid a federal tax lien by simply filing and paying all your taxes in full and on time. If you can’t file or pay on time, don’t ignore the letters or correspondence you get from the IRS. If you can’t pay the full amount you owe, payment options are available to help you settle your tax debt over time.”

Contact the tax experts at Powell Tax Law today in the Austin, Houston, and San Antonio area for help if you have received an IRS federal tax lien notice.