What Are Tax Liens?

Find out what to do if you have a tax lien.

If you neglect to pay a tax debt, the federal government can make a legal claim against your property. This claim is called a tax lien.

To avoid a tax lien, keep reading to find out what to do when you can’t pay your tax bill.

How Tax Liens Are Filed

Before a tax lien is filed, the IRS assesses your balance due and sends you a bill that shows how much you owe, including the penalties for filing late. A tax lien is only filed if you neglect or refuse to pay your debt fully in the allotted time.

If you fail to meet the payment deadline, the IRS will file a Notice of Federal Tax Lien, a public document that alerts creditors that the government has a legal right to your property, including real estate, personal property and other financial assets.

The best way to find out if you have a tax lien is to contact the Department of Treasury’s Bureau of Fiscal Service’s Treasury Offset Program.

See: What Is a Tax Levy and How Can You Prevent It?

How Tax Liens Affect Your Finances

Tax liens affect all aspects of your finances including:

  • Assets: A federal tax lien covers all of your assets and also attaches to any assets you acquire during the duration of the lien.
  • Business property: A tax lien can be attached to business property as well as individual property. It also attaches to all rights to business property, including accounts receivable.
  • Bankruptcy: Your tax lien and tax debt can continue after you file for bankruptcy.
  • Credit: A tax lien can limit your ability to obtain new lines of credit.

Will a Tax Lien Affect Your Credit Score?

Although a tax lien can limit your ability to get credit, it will no longer affect your credit score. In April 2018, the three major credit unions removed tax liens from consumer credit reports. The change was made after a Consumer Financial Protection Bureau Study reported issues with the way information was sent to credit bureaus. If you previously had a tax lien on your credit report, you could see your FICO score jump by as many as 30 points.

Related: Ways to Raise Your Credit Score

How to Remove a Tax Lien

The best method for tax lien removal is to pay back your tax debt in full. Once your debt is paid back, the IRS will release your tax lien within 30 days.

How to Pay a Tax Lien

You can pay the IRS directly through its website with a debit or credit card, through the Electronic Federal Tax Payment System, with a same-day wire, check or money order, or via cash at a retail partner.

How to Reduce the Impact of a Tax Lien

If repayment is not an option, there are other ways to reduce the impact of a tax lien:

  • Discharge of property: A “discharge” doesn’t get rid of a tax lien, but it can be used to remove it from a specific property.
  • Subordination: Subordination is useful if you would like to apply for a loan or mortgage. It does not remove a tax lien, but it allows other creditors to move ahead of the IRS.
  • Withdrawal: Withdrawing a tax lien removes the public notice to ensure that the IRS is not competing with other creditors for your property.

Learn: How to Minimize Tax Debt

Options for Tax Lien Withdrawal

If you wish to have your tax lien withdrawn, you have several options. The traditional way is to fill out an Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien, which is available on the IRS website.

The IRS Fresh Start Program also offers two other options to qualify for a withdrawal.

The first option allows for a withdrawal of your Notice of Federal Tax Lien after the lien’s release if you meet the following criteria:

  • Your tax debt has been paid off.
  • You have complied with tax filing deadlines for the past three years.
  • You are current on all estimated tax payments.

The second option might allow you to withdraw your tax lien if you have converted your regular installment agreement to a direct debit installment agreement, and you meet the following criteria:

  • You are a qualified taxpayer.
  • You owe $25,000 or less.
  • Your direct debit installment agreement will have paid off the full amount you owe within five years, or before the collection statute expires.
  • You have complied with all filing and payment requirements.
  • You have made three direct debit payments in a row.
  • You have not defaulted on your current direct debit installment agreement or any previous agreements.

Learn how to get on an IRS payment plan.

How to Avoid a Tax Lien

Federal tax liens are avoided by filing your taxes on time and paying any owed taxes in full and on time. If you cannot pay the full amount owed on time, there are other payment options available that can be used to settle your tax debt while avoiding a tax lien.

Click through to learn how to pay off back taxes.

More on Tax Laws