Tax Lien | Definition

Tax liens can negatively impact your financial position as they can hurt your credit rating. Also, the government would have priority over funds that you receive, as they must receive their share. To prevent tax liens from affecting your finances, make sure you pay your taxes on time, and in full.

Taxes aren’t easy to understand, but they must be paid correctly to avoid penalties. One common penalty is a tax lien. A lien is a right to receive payment ahead of the owner of an asset.

A tax lien is a lien put against your property until the debt is paid in full by you or paid from the proceeds of the sale of your real estate property. In other words, if you sell a home worth $200,000 and owe $100,000 to your mortgage company but have a $25,000 tax lien, you would walk away with $75,000 and not $100,000 from the sale because the government gets paid first.

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How Do I Know If I Have a Tax Lien?

The Internal Revenue Service (IRS) will reveal to you that you have a tax lien. As soon as you are overdue on your tax payment, you will receive a notice in the mail that you owe taxes. If you neglect or refuse to pay or choose not to, the IRS will file a Notice of Federal Tax Lien. 

This notice goes into your credit report to alert any lenders that the IRS has priority of payment on your property. That means when you sell the property, a check to the government gets cut first.

You will receive regular mail and even phone calls from the IRS to pay your tax bill. However, be aware that some of these messages may be from scammers or fraudsters. Therefore, try to avoid being scammed during this process by calling the IRS directly before giving any banking information.

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How Do I Get Rid of a Tax Lien?

The easiest way to remove a tax lien is to pay your payable income taxes. The IRS will remove the lien within 30 days when the taxes are paid. Another way to get rid of the lien is to sell your house, but the lien may make it difficult to sell.

The IRS website lists other ways to circumvent the lien, but you will still owe the debt. You must pay off the debt to make the tax bill go away.

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Consequences of Not Paying a Tax Lien

Several things can happen if you continue to avoid paying your tax bill. First, the government, usually a municipality, can issue a tax lien certificate that states how much you owe and the property it is tied to. These certificates can then be auctioned to investors. 

The government takes a cut of how much they are owed, but the debt is off the books. The investor can then collect the full amount or take possession of the property to recoup their investment. This usually only happens with unpaid property taxes.

Another option is to levy the house, meaning you are forced to sell your property to satisfy the tax bill.

Impact of a Tax Lien on Finances

Having a tax lien on your credit file can make it difficult to obtain credit. It allows the IRS to have priority payments on assets you own. Bankruptcy won’t erase tax debt; the best way to handle a tax lien is to pay it off.

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