Federal Tax Lien

A federal tax lien is the U.S. government's right to keep a person's personal property until that person takes care of unpaid back taxes. The lien allows the Internal Revenue Service (IRS) to secure or otherwise requisition the taxpayer's property in order to secure payment. Federal tax liens apply to unpaid taxes of any kind, including income, self-employment, gift or estate taxes.

Federal tax liens differ from tax levies in that they only denote the government's right to seize property, as opposed to the actual seizure of it. The IRS will often "perfect" a tax lien by filing notice with states and other creditors that it is first in line to receive payment for back taxes. Federal tax liens tend to substantially downgrade an individual's credit score, and in many cases, those with a tax lien must pay taxes in full before receiving financing of any kind

A federal tax lien exists once the IRS assesses a taxpayer’s debt. They then send the taxpayer a bill that explains how much the taxpayer owes. This is known as a notice and demand for payment. The IRS then, if it chooses, exacts a lien on the person's assets if the taxpayer fails to pay the debt in time, either through negligence or refusal.

This lien attaches to all of a taxpayer’s assets, including securities, property and vehicles. Any assets the taxpayer acquires while the lien is in effect also apply. The lien also attaches to any business property, rights to business property and accounts receivable for a business. If the taxpayer chooses to file for bankruptcy, the lien and the tax debt often continue even after the bankruptcy. This is notable, since bankruptcy otherwise wipes out a person’s debt.

The simplest way to get rid of a federal tax lien is to pay all of the taxes owed in a timely manner. However, if this is not possible, there are other ways that a taxpayer can deal with a lien.

The taxpayer may discharge a specific property. This means that they remove the lien from a specific piece of property, such as a home. However, not all taxpayers or properties are eligible for discharge. Publication 783 details regulations about discharging property.

Subordination does not actually remove the lien from any property, but it sometimes makes it easier for the taxpayer to obtain another mortgage or loan.

Withdrawal does away with the public notice of a federal tax lien. The taxpayer is still liable for the debt, but under withdrawal, the IRS does not compete with any other creditors for the debtor’s property.