If you owe the IRS money and ignore the debt for too long, the IRS will file a tax lien. We thought it might be helpful to explore this topic and answer additional questions.
In this article, we’re taking a closer look at a common question we hear from people – When does the IRS file a tax lien?
When Does the IRS File a Tax Lien?
The typical timeline for tax liens (outside of exceptional circumstances, such as during the early onset of the corona pandemic) is as follows: the IRS will inform you that you owe taxes via a Notice of Deficiency. If the debt is $10,000 or more (up from $5,000 before the IRS Fresh Start program), then the IRS will file a federal tax lien as early as ten days after you receive your notice.
When issuing a federal tax lien, the first thing the IRS does is create a public Notice of Federal Tax Lien to inform other creditors that all your assets and property are under a tax lien from the government. The IRS will also inform you personally.
If your debt is lower than $10,000, the IRS still reserves the right to issue a tax lien should they feel the need to collect more urgently and want to protect their interest, either because they fear you may be close to bankruptcy, or because they’ve found out that you’re in the process of liquidating assets to avoid paying.
If your tax debt is inching closer towards its expiration date (as per the collection statute expiration date of 10 years after the tax assessment date, plus any applicable tolling), then the IRS may utilize a federal tax lien and other legal means to urge you to pay.
So, when does the IRS file a tax lien?
Jump to: Tax Lien Removal
What is a Federal Tax Lien?
A federal tax lien occurs when a taxpayer fails to pay their outstanding tax liability. When the IRS determines that you owe the government money and you do not cover your debt with them, they may issue a tax lien to protect their interest in your assets.
A tax lien itself does not claim any money or sell any of your property. Instead, the government effectively states through a lien that their interest takes priority over other creditors, and should you liquidate your assets, they are first in line to be paid. As such, tax liens can be quite restrictive, and by design are meant to pressure taxpayers into dealing with their tax liability as soon as possible.
However, there are established rules around tax liens. The IRS will typically be more lenient with very small debts and is unlikely to jump the gun and issue a tax lien when all you owe is a few hundred dollars. That being said, tax debts do grow with penalties and interest, and even with smaller debt, the longer you ignore the IRS, the more likely it is they will pursue your case more aggressively.
What an IRS Tax Lien Means for You
An IRS tax lien does not mean the government will be standing at your door and asking you for the keys to the house. It does, however, impede your ability to get credit, seek employment, or, in the case of self-employed taxpayers, attract new clients, and grow your business.
In the past, the consequences for a federal tax lien were even steeper. Creditors were the first to be informed via the IRS’s public notice, and this resulted in steep drops in credit scores from the country’s major credit reporting agencies for the taxpayers in question. A significant drop in credit score can massively impact you for years to come – and the average federal tax lien left a black mark on a taxpayer’s credit score for up to seven years.
The major credit reporting agencies have since gone back on calculating tax liens into a taxpayer’s credit score, citing major issues around correct implementation and mistaken credit score drops, but a tax lien can still play a role in refinancing efforts and potentially hamper your ability to pay off other debts or meet important payment deadlines (and causing an indirect drop in your credit score).
The most severe consequence of a tax lien is that it often leads to a tax levy if ignored. Tax levies involve physically claiming property or assets or taking a portion of your wages through your employer until your tax debt is paid.
The IRS does not need to file a tax lien before it files a tax levy, but it will usually try to coerce payment through a lien before it issues levies. Tax levies are issued 30 days after the IRS sends out a Final Notice of Intent to Levy, giving taxpayers a month to file an appeal or make payments to eliminate or reduce their debt.
Getting a Tax Lien Released
If the IRS has you dead to rights on your tax liability, then the only thing you can do to release a tax lien is pay off your debt. If you do not have the means to pay off your entire tax debt within a reasonable amount of time, you may try to file an Offer in Compromise to reduce the debt to an amount you can reasonably pay.
The IRS will consider dropping a tax lien if you’ve sent in multiple payments without missing a single one, provided you are up to date on all your tax returns and estimated payments (if you make any), and haven’t previously missed a payment while in a payment plan with the IRS.
If you are at the end of a long rope and must file bankruptcy, the IRS’s tax lien can and usually does persist. As does the federal tax debt. If you do not have the means to pay at all, you can convince the IRS to halt all collection efforts for some time by filing as Currently Not Collectible. This will prevent the IRS from filing a levy on your property for as long as you remain not collectible, but the tax lien will remain (as will the debt).
Tax Liens, Loans, and Financing
If a tax lien is preventing you from accessing the means to pay off your debt, and you can prove this, the IRS offers taxpayers two options for temporarily releasing a federal tax lien or reducing the scope of the lien in order to give way to certain creditors and pay off your tax debt via subordination (giving a select creditor priority over the government’s claim), or discharge (removing the lien from one property or asset).
Seeking Professional Tax Help
A federal tax lien can severely impact your finances and may lead to more severe tax consequences. If you’re worried about the IRS’s interest in your property, it would be in your interest to get in touch with a reputable tax debt firm. Time is of the essence – IRS penalties and interests can be quite steep, and their deadlines are short.