An IRS Tax Lien Can Add A Lean And Hungry Look To Your Financial Life

The IRS defines a federal tax lien as “the government’s legal claim against your property when you neglect or fail to pay a tax debt.” Like any other type of lien, the IRS variety keeps you from cashing in on sales of property -- real estate and personal -- because the government now has an interest in any future cash that could come your way before you settle up.

The ABCs of a tax lien

A tax lien affects your assets, business and credit standing:

• Your assets, present and future that you own or acquire during the duration of the lien cannot be liquidated unless the IRS lifts the lien.
• Your business property and all your receivable accounts suffer the same fate as your personal assets.
• Your credit rating could suffer greatly as the result of a tax lien. You could experience a whopping 100-point drop.

Finally, even though you file for bankruptcy, everything you salvage afterward is still encumbered by the lien.

The lien process

The IRS is the 50-pound gorilla of collection agencies. To collect unpaid taxes it can file a Notice of Federal Tax Lien at a local courthouse. Once recorded, the tax lien puts the IRS at the head of the line of any other third-party indebtedness claims.

Legally, the IRS can go the lien route after waiting just ten days for a non response to their original demand letter. In practice, they usually don’t record lien notices until they have sent all the required letters of notification -- five of them -- beginning about six weeks after your return is filed and audited.

A lien is not a levy

A tax levy is the outright confiscation of your property and assets -- your land, your paycheck, your bank account, etc. -- to pay a tax debt. Avoiding a levy and settling up is far less complicated than heading off a tax lien filing. On the other hand, The IRS won’t usually bother with a lien if the tax bill is less than $10,000.

According to Steve Rhode in a recent Huffington Post article:

“If you owe more than $10,000, you can still avoid a federal tax lien filing. Even if you can't pay the tax immediately, the most effective ways to avoid a federal tax lien filing are to request an extension of time to pay of up to 120 days or to enter into a streamlined installment agreement to pay the full balance.”

The good news is that, in recognition of these more difficult economic times, the IRS has adopted a more lenient approach under its Fresh Start Program. The changes instituted in the IRS administrative relaxed rules resulted in a 32 percent drop in the number of tax liens during the 2011 to 2012 tax years.

So tax audits, levies and liens can be the stuff of sleepless nights and could entangle your finances to the point of paralysis. Rather than getting to that point of desperation, your best option is to get some tax resolution help from a tax expert. We’ll help you get that lien lifted and clean up your levy difficulties. Get your free estimate from one of our Senior Tax Professionals.