When the IRS contacts you regarding taxes owed and you do not respond in a timely manner, you can issue a federal property tax lien. This is a serious event that may affect you in many different ways, but be aware that you have options to resolve your problems like tax debt, with the IRS.
7 Consequences of a federal tax lien
- It can affect your credit score
- Goods can be seized
- Impact on funding applications.
- The IRS has the first right in the sale of properties
- Adheres to business property
- Public Records Shows
- The lien continues through bankruptcy
The Internal Revenue Service (IRS) can impose a tax lien on your assets if it owes you money in taxes. This can occur after a tax return has been processed or the federal IRS has processed a substitute return (SFR). It can also happen after filing an amended return or an audit.
A federal tax lien is a public notice that you owe money to the IRS and that you are claiming an interest in your property and assets. The lien is sometimes filed with the government of the county where the taxpayer lives. In general, the IRS will give you a time frame to pay the bill after notice and demand for payment, along with the ability to dispute the lien before it is applied. Those who neglect or refuse to pay and miss the deadline will see a lien apply, and eventually the IRS will collect or seize their assets to pay the amount owed. Be sure to read our tax article for more information.
If you owe the IRS money, you must act as soon as possible. The IRS imposes fines and high fees on late tax payments, including daily compounding. The longer you wait, the more expensive it will be resolved. If you are issued a federal tax lien, be prepared for the following consequences:
- It can affect your credit score
A federal tax lien is a matter of public record, and credit bureaus that calculate your credit score may take that information into account in their records. In the past, this has had a negative impact on your credit score that could vary in severity. A federal tax lien would have remained on a taxpayer’s credit report for 15 years if it was not paid, or up to seven years after it was paid. Once you have obtained a federal tax lien exemption, you can ask the reporting agencies to change your credit records.
Recently, however, all three credit reporting companies are no longer able to include tax lien penalties when calculating credit scores. This was due to changes in policies affecting the type of information collected for a lien, and the relative difficulty required to accurately collect and classify this information from various sources.
- Assets can be seized
A tax lien is a precursor to the IRS taking steps to collect a tax debt. A tax occurs when the IRS seizes assets to pay off the tax debt. The IRS has improved debt collection power compared to other creditors and can raise a wide range of assets. This may include vehicles and residences. However, the IRS generally will not take your primary residence or vehicle necessary to go to work or school. Other assets that may be seized include retirement and savings accounts, life insurance policies, and government benefits. Your bank account may also be stuck for a period of time (such as 21 days) before the bank account is removed.
The IRS can also garnish your wages directly from your paycheck. The IRS does not need a court order to do this and may take a higher percentage compared to other debt collectors who may be online. Quitting your job to avoid wage garnishment will also not work, as Social Security benefits, unemployment, welfare or other public assistance, including worker’s compensation, may also be garnished. The IRS can also claim any future tax returns and other assets.
- Impact on funding applications
Another disadvantage of having a federal tax lien on the public record is the impact on your financing options. Many lenders may be afraid of giving money to someone with a tax lien. This is due in part to the fact that the IRS gets the first claim for assets. If you did not meet the loan from the lender, the bank may not be able to get your money back, even if it was protected against your assets. It would be difficult for you to get something on credit, such as houses, cars, business loans, and even loans to pay off your tax debt. However, the IRS may be willing to negotiate with you, and there are a few options for obtaining special financing.
- The IRS has the first right on the sale of properties
A federal lien on your property and assets means the IRS is claiming that you owe them money. Until that lien is removed, it will be more difficult to sell the property. The IRS can confiscate any property it sells to pay the debt, since the IRS tax lien takes precedence over other liens. This subordination of lien can make it much more difficult to manage your assets effectively while working with the IRS.
In some cases, the IRS can issue a risk lien to seize assets immediately and without notice. This is only done in cases where the taxpayer could be a flight risk or when he tries to move his assets out of the government’s reach. There are ways to dispute a risk lien, and there may be a way to get the lien downloaded to sell property. In general, the IRS will seek court approval to seize assets and may even obtain court orders to enter your residence to seize assets. By acting quickly, you can get back some of your property that has already been sold by the IRS to pay off your tax debt. Contact an Acadia LawGroup attorney today for professional legal help.
- Adheres to business property
Businesses that do not pay estimated income, property, or taxes may also discover that they are subject to a Public Notice of Federal Tax Lien (NFTL). This tax is attached to all business assets and has a major impact on the company’s assets. This includes a lien on equipment and inventory, as well as patents and other intellectual property. For some companies, such as those structured as sole proprietorships or partnerships, the IRS may hold owners personally liable for business taxes. The idea is not to impede your ability to do business, but to insure those assets in the event that you are unable or unable to return to the government what you believe is owed. Once again,
- Shows in public records
By the time a taxpayer receives a Notice of Federal Tax Lien, the tax lien has already been made public and filed with the appropriate county office. Once this is done, it will show in your public records that you owe the IRS money. The notice will also detail why the money is owed, the dollar amount owed, and when it was applied. Anyone can see if they owe money to the government, including credit bureaus.
It is important to note that the Federal Tax Lien Notice may not show the correct amount owed if you have already made payments, collected previous taxes, or qualified for a tax refund. Even the full lien may not be valid if the full amount has already been paid.
The IRS may place a lien at the time it determines that an amount is due and delivers a Notice and Demand for payment to the taxpayer. Please note that public records are accessible online as well as at county offices.
- Lien Continues Through Bankruptcy
Underpayment of taxes, such as incorrect calculation of estimated taxes, can result in heavy fines. Another consequence of a federal IRS tax lien is that it can persist even after bankruptcy, in some cases. Bankruptcy procedures can help eliminate other debts while protecting some assets from creditors, but they may not protect your assets from the IRS. There are situations where bankruptcy can help, but there are consequences in filing for bankruptcy. In these cases, it would be best to discuss your particular situation with an experienced tax attorney.