What is a Tax Lien?
Last Updated: August 17, 2017
The impact of a tax lien on your financial life can be extensive and long-lasting. So whether you already have a tax lien against you, or you're trying to avoid one at all cost, the more you know about the process, the better. And this is a good place to start.
What is a Tax Lien?
A tax lien is the federal or state government's legal claim on your property. While this certainly applies to real estate and vehicles, for example, a tax lien also applies to financial assets.
Under What Circumstances Will a Tax Lien be Filed?
A tax lien will be filed if and when the following circumstances apply:
- You do not pay a tax debt in full.
- The IRS bills you for the unpaid amount, demanding immediate payment.
- You do not pay the debt OR make any sort of payment arrangement, ignoring the debt for all intents and purposes.
What is a Notice of a Federal Tax Lien?
A Notice of Federal Tax Lien is the federal government's public notice declaring that you owe the tax debt. It is part of the public record, meaning anyone has access to this information, including creditors.
How Does a Tax Lien Affect My Credit?
Since tax liens are a matter of public record, the three major credit bureaus include them in consumer credit reports. Unfortunately, a tax lien can easily knock 100 points off your credit score.
How Can I Avoid a Tax Lien?
The guaranteed way of avoiding a tax lien is to pay your tax debt in full and on time. If it's too late for that, your second-best option is to enter into an installment agreement and, ultimately, pay the debt in full in this manner.
How Can I Have a Tax Lien Released?
Pay the Debt in Full. After doing so, the lien will be released within 30 days. Note, however, this will not automatically remove evidence of the lien on your credit reports.
Offer In Compromise. This is a settling of your tax debt for less than what you owe. If the government deems that you meet eligibility requirements, they will release the tax lien upon acceptance of the offer. That said, Offers In Compromise are not easy to get, requiring that you meet strict eligibility requirements. Again, this will not automatically remove evidence of the lien on your credit reports.
Discharge of Property. This will remove a tax lien from specific property. Eligibility requirements apply.
How Long After I Pay the Debt Will a Tax Lien be Released?
Once paid in full, the government should release the tax lien within 30 days.
How Long After I Pay the Debt Will a Tax Lien be Removed From My Credit Reports?
It takes 7 years for a paid tax lien to fall off of your credit reports. During this time, however, you should make sure the reports reflect that the debt has been paid. That said, you may be able to have a federal lien removed sooner through the government's Fresh Start program.
What is the Federal Government's Fresh Start Program?
To encourage people to pay their tax liens in full rather than offer settlements, the federal government introduced the Fresh Start program. If you pay your lien in full, you can request that the IRS withdraw your tax lien (as opposed to simply releasing it). If and when you are able to do this, let the credit bureaus know, as they do not include withdrawn tax liens on their credit reports.
If you owe less than $25,000, you may actually be able to have the tax lien withdrawn before you have actually paid the tax debt in full. Other eligibility requirements apply, such as entering into a direct debit installment agreement.
Will Filing Bankruptcy Remove a Tax Lien?
Though bankruptcy may discharge certain tax debts, it will not release tax liens, not even for years that the bankruptcy may have discharged. That said, there are circumstances in which you may be able to challenge a tax lien in court -- if it is more than 10 years old, for example.
What is the Difference Between a Tax Lien and a Tax Levy?
A tax lien is the government's legal claim on your property. A tax levy is the government's seizure of said property.