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What You Need to Know About Federal Tax Liens

As much as individuals and businesses dislike paying federal taxes, it is better than the alternative – facing a federal tax lien. Here is a brief run-down of how a federal tax lien operates and what can be done about it.

What is a federal tax lien?

A lien is essentially the right to take or keep someone else’s property or assets until a debt has been paid. A federal tax lien, then, is a lien by the federal government for an unpaid tax debt.

A lien-holder has the first right to the debtor’s assets and the lien holder with the highest priority lien will be paid before other creditors. When the IRS files a Notice of Federal Tax Lien, the document is public and it puts the debtor’s other creditors on notice that the IRS has a secured claim. Unlike other liens, the IRS also attaches it to property later acquired, which makes it difficult to obtain any credit for large purchases.

If a debtor does not pay a lien, the IRS can levy (seize and sell) the real and personal property in which the debtor has interest.

When does the IRS file a Federal tax lien?

After the IRS assesses the debtor’s liability and sends a bill titled a Notice of Payment, the debtor has 10 days to pay the debt. If the debtor fails to pay, the IRS files a Notice of Federal Tax Lien that lets other creditors know about the government’s claim to the debtor’s property.

One thing that makes a federal tax lien unique is that other creditors usually need to sue the debtor and obtain a judgment before filing a lien. The IRS does not need to sue first; it can file the lien once the tax bill has gone unpaid. A federal tax lien is also unique in the scope of property to which it attaches – business and personal property, later-acquired property, even accounts receivable.

What to do about a federal tax lien

Tax liens expire after 10 years – after that, the debtor still owes any unpaid debt but the IRS can no longer seize the assets. However, unlike other debts, it can remain on a credit report beyond seven years.

To remove the lien, there are a few options:

  • Pay the debt – once it is paid in full, the IRS will release the lien within 30 days
  • Settle for a lesser agreed-to amount, called an offer in compromise

Without paying in full, there are a couple options to limit the effect the lien has on credit:

  • Apply for a Certificate of Subordination – this allows other creditors to have a higher priority lien, which may entice them to extend credit
  • Apply for a Withdrawal – this allows a debtor to have the lien removed from a credit report before seven years has passed, either after the lien has been paid off or after entering into an installment plan

Speak with a tax professional

The best way to avoid a federal tax lien is to pay taxes when due. Both individuals and businesses face unique circumstances and changing laws but an experienced tax attorney can provide much-needed advice. To discuss your options with a Maryland tax attorney, call Rosenberg Martin Greenberg to schedule a consultation.

Additional Federal Tax Lien Resources

  1. IRS, Understanding a Federal Tax Lien, https://www.irs.gov/businesses/small-businesses-self-employed/understanding-a-federal-tax-lien
  2. The Balance, Preventing and Removing Tax Liens, https://www.thebalance.com/federal-tax-liens-3193403

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Rosenberg Martin Greenberg

705 Melvin Avenue Annapolis, MD 21401
Phone: 410-727-6600
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