What is an IRS Tax Lien?

At times, in order to protect the government’s interests, the IRS may file a Notice of Federal Tax Lien against a taxpayer in regards to delinquent tax debts. What is an IRS tax lien?

By law, a statutory Federal Tax Lien arises any time a taxpayer has a tax balance, a demand for payment has been made by the IRS in writing, and the taxpayer has not paid or addressed the balance within 10 days of demand.

If the IRS chooses to do so, a Notice (>> Publisher: You may wish to italicize the word notice) of Federal Tax Lien may be filed. This notice is what the IRS uses to make that lien public, and to initiate the effect of the statutory lien against a taxpayer’s assets.

The IRS lien is filed in addition to other potential lien holders. This means that should a taxpayer own any real property, the IRS lien then falls into place along with any other liens on that property, according to date priority.

In general, creditors who have their lien, also called a proof of claim, filed against a taxpayer’s property, such as the bank that loaned them the mortgage, would be paid out first. If a taxpayer owns property outright, and there are no other encumbrances on the property, like a state lien, mechanics or judicial lien, then the IRS lien has first priority.

If a taxpayer’s property is sold, foreclosed on or undergoes an ownership transfer, the IRS would then be paid out of any potential proceeds from the sale, after any other liens that were there first are satisfied.

A taxpayer does not have to own any real property in order for the IRS to file a lien. As a matter of policy, the IRS can file a lien anytime a taxpayer owes more than $5,000 and the notice of intent to file a lien has been served. This means that most aged delinquent balances likely have notices of liens filed against them.

If a taxpayer owns no assets, then the lien is only reflected on a taxpayer’s credit report as a notice of public debt of the delinquent taxes owed to the IRS. Once the debt becomes public, third party tax resolution firms will monitor lien filings and target taxpayers with mailings and other advertisements that offer their services.

In some cases, even though a taxpayer has entered into resolution of their balances, the IRS will still file a Notice of Lien. If balances are high, generally over $25,000, the IRS is required to file a lien even if a taxpayer has agreed to pay the amount off in installments. Additionally, any time a taxpayer requires an extended amount of time to satisfy their debts, generally over 5 years, the IRS will also file a lien if they agree to allow a long-term repayment plan.

The Notice of Federal Tax lien is mailed out to the county seat where the original filing is kept. The taxpayer is copied, and given appeal rights, which they may choose to exercise.

Once the IRS files a lien, they generally will not release it until the tax balances have been paid in full. Unless a taxpayer can demonstrate the lien filing was premature, or not done according to procedure, the IRS will not lift, or withdraw the lien filing.

At times, a taxpayer may wish to sell their property, or may have equity that they can borrow from their property in order to pay off the lien, but the same IRS lien prevents them from doing so. The IRS has two programs to deal with these situations.

The IRS may agree to subordinate the lien, or lower their priority of the lien, in order to allow another creditor to grant a line of equity or credit to the taxpayer, if that equity can then be used to pay off the IRS lien. A taxpayers who has a lien but is looking to refinance their home, or take an equity line of credit in order to pay off the IRS, can take advantage of this option.

If a taxpayer wants to sell their home but cannot do so because of the lien, then the IRS may grant a Notice of Discharge of Property. This allows for discharge of just that parcel from the lien, and allows the sale to be completed. Otherwise the title would remain clouded and the buyer would be purchasing an encumbered property. The IRS would not grant this unless there are proceeds from the sale that would be paid toward the lien, which would still remain in place against the taxpayer until the remaining balance is fully paid.

For more information on lien discharges and subordination, see IRS Publications 783 and 784.