Lien Information

A lien is a legal claim to some piece of property. Liens come up in a variety of situations. Any property that carries a lien can be forced in to sale by the lender, in order to collect what is owed, if the loan is in default. Some liens are placed on your property automatically as a condition of purchase. These lien holders have a legal right to take control of your property if certain conditions aren’t met. For example, when you buy a home, your mortgage lender will place a lien on the house until you repay the mortgage. Similarly, your auto lender places a lien on your card until you pay off your car loan.

Other types of liens are placed on your property because you failed to pay a debt. For example, if you fail to pay your federal or state taxes, the revenue department could file a tax lien on your property. If you don’t pay the debt, the lien holder can liquidate the property and use the proceeds to pay off the debt.  

A lien is the first major step the IRS takes against individuals in order to collect back taxes. A lien gives the IRS a legal claim to your property as security or payment for your tax debt. It is used in order to protect the government's interest.  The purpose of a tax lien is to prevent you from selling or borrowing against any of the major assets you own. Also, tax liens remove your right to the property. You can have a lien filed against you for many different types of property, such as cars.

How do you get a lien?

Tax liens are reported to the major credit bureaus – Equifax, Experian, and TransUnion – and are included on your credit report. These unpaid liens will hurt your credit rating and can impact your ability to get credit cards and loans in the future. If you have a Federal tax lien, the IRS can place a claim on all your assets until the debt has been repaid.

The IRS will send you letters assessing your debt, when you repeatedly ignore these letters and after the 4th or 5th letter, the IRS will send you a notice and demand letter stating how much you owe & you have 10 days to pay the taxes.  If you neglect to pay after receiving this letter and the 10 days have passed, The IRS will file a lien against you.

Effects

Tax liens can be financially crippling because having a lien in place means that you generally can’t hold assets in your own name and you have to rely on other people for financing. You also will not be able to receive refunds from the IRS when you file your tax returns until all of the money that you owe the IRS from previous years is paid off. Plus, all of your creditors will be notified. A lien makes it very difficult to get any credit to make additional large purchases, such as a boat, car, or house. Liens are public record.

In addition, once you have a tax lien, the IRS becomes the highest priority of creditors, so if you sold your house, car, or any other property the lien was attached to, the IRS would be the first to be paid.

If you do nothing about the tax lien, the IRS will eventually begin to seize your assets and sell them. This is called a tax levy.

Releasing

However, a lien cannot last forever. A tax lien will stay in place as long as the IRS can legally enforce action against you. This is typically a ten year statute of limitations. However, it is not advisable to try to wait it out until the statute of limitations expires because most likely you will have a levy on your assets before that ten year period passes.

If you are able to pay off your debts before that period, the lien can be released as well. To release your lien you must pay off the lien or submit a bond. This can be difficult in many situations because if you have the money to do this, you probably have the money to pay off your debts. If you are able to pay the lien off, the IRS must release the lien within thirty days.

It is important to understand that even when a tax lien is released and your public records are updated as showing that the tax lien was released, the fact that you received a tax lien in the first place may still hinder your ability to borrow money, get a job, rent a house, and engage in many other financial transactions. You can get help in expunging the lien from public records though in order to prevent long-term adverse effects.

Offer in Compromise

A tax lien will be released when your offer is accepted. With an Offer in Compromise you can possibly settle your taxes owed for a fraction of the total taxes owed but your financial situation must be the right fit. You will have to prove that the amount you offer them is more than or equal to the amount they are likely to collect from you if they enforced collection. There are many other options as to how to release a lien, like setting up a payment arrangement with the IRS or pursuing other settlement options. These options all depend on the details of your specific financial situation.

If the IRS has notified you that you are at risk for a lien or if you already have a lien filed against you, the Low Income Taxpayer Clinic at Legal Aid of Arkansas may be able to help. Contact us at 479-442-0600, ext. 4312.