IRS Tax Liens – What Are They?
What is an IRS Tax Lien?
In legal terms, an IRS tax lien is an “encumbrance”, meaning a claim, against your property. Think of it like a home mortgage or car loan. A tax lien is NOT an asset seizure! An IRS tax lien does not transfer your ownership of property to the IRS or make the IRS a co-owner like an IRS tax levy does.
When an IRS tax lien arises, the IRS is potentially given priority of payment ahead of you and other creditors. If you later sell your assets, for example your home, the IRS may receive a share of any proceeds. I tell taxpayers to think of an IRS tax lien as if the IRS had a big hand out when you sell property, and you will get a good idea on how a lien works.
IRS Tax Lien Versus Tax Levy
As I said earlier, an IRS tax lien is not an asset seizure or tax levy as the IRS calls it. An IRS tax levy gives the IRS the right to seize property from a delinquent taxpayer, such as from garnishing wages or seizing funds in a bank account. Rarely does the IRS seize homes, cars, or other property based on a tax lien (through foreclosure of the lien) but not out of the question. The IRS has to jump through some hoops. Generally, the IRS seeks approval from IRS counsel to do so as it will have to go through the courts first. Approval of such a move is hardly given.
For now, the important point about an IRS tax lien is that while it is not a seizure of your assets by the IRS, it is a claim against your property which will impact you when you later buy or sell property. Usually, when you later sell your home or other real estate.
Beware the Silent IRS Tax Lien
Many clients think an IRS tax lien only arises once notice is filed by the IRS in the county registry of deeds. They are wrong. Once the IRS has sent you a demand for payment and you fail to pay, a silent lien (as it is called) arises by law. The IRS now has a claim against your property and is not required to file anything in the registry of deeds. This can create a problem if the IRS may have to fight with other creditors if there are multiple claims against you.
In that case, the IRS may (but is not required) to file notice of the tax lien. Often, the IRS will send this notice (called a Notice of Federal Tax Lien) if the total tax liability exceeds $10,000. This is not a hard or fast rule. We have seen Federal tax liens filed for smaller balances due as well as no Federal tax liens filed where a taxpayer owed substantially more than $10,000. This “Notice of Federal Tax Lien” lets other parties know that the IRS has a claim against your property. Now the IRS may be able to establish priority over other creditors.
In my next post, I will discuss why it is important to understand that distinction between an IRS tax lien and a Notice of Federal Tax Lien. For now, just remember that a silent lien arises upon failure to pay a tax debt after notice and demand for payment to protect the government’s interest whereas the Notice of Federal Tax Lien must be filed to give notice to third parties of the Federal tax lien.
In summary, an IRS tax lien arises automatically by law after you do not pay your tax debts (the “silent tax lien”). Only you and the IRS know of this tax lien. The IRS now has a claim against all your property, whether personal property or real estate and whether in your name or not. This lien is not an asset seizure, it is only a potential claim against your assets in case of a future sale. The IRS cannot seize your property unless it takes further action. At that point, only the IRS and you know of the Federal tax lien. Only upon the subsequent filing of the Notice of Federal Tax Lien will anyone else become aware of the Federal tax lien against you.
Regardless of whether anyone know of the lien or not, outside you and the IRS, a tax lien can cause you problems. In my next blog post, I am going to talk about how IRS tax liens negatively affect your life, especially when the Notice of Federal Tax Lien is filed.
I am Maine’s IRS Problem Solver. My firm helps Maine taxpayers in trouble. If you or someone you know in Southern Maine wants more information on how to resolve your unpaid taxes, please feel free to contact me directly at 207-502-7181 or by filing out my contact form. A Maine tax attorney can help you consider your options.