If you stop paying your water bill, your water will one day stop working. If you fail to pay your credit card balance due, you’ll be hit with late fees until your access is eventually cut off. If you decline to pay your tax bill, nothing will happen initially. Eventually, you’ll get a notice by mail and find that the IRS is adding penalties each month of 0.5 percent on the amount due, plus interest. But if you continue to ignore your tax debt, the IRS will take action, eventually filing a federal tax lien against your property.
You can find out if you have a federal tax lien by calling the IRS, checking the funds you owe on the IRS website or visiting your secretary of state’s website.
Looking Up a Federal Tax Lien
Chances are if there’s a lien against your property, you at least strongly suspect it. At the very least, you’re aware that you didn’t pay your taxes when you were supposed to at some point. You may have seen some of your refund withheld for subsequent returns or you possibly ignored one or more IRS notices. However, if you’ve moved, you may not be 100 percent sure if the IRS has sent you a mailing.
You can be even less aware that a lien has been placed on your property. The IRS is a government agency, so it can work directly with local governments and even your creditors to place a lien on your property. It does this through a notice directly to those entities. To find out if there’s a lien on your property, you can contact the IRS Centralized Lien Unit at (800) 913-6050. You can also check to see how much you owe the IRS and pay the balance due, if no lien has been placed yet, by visiting the IRS website and searching for “Check Your Balance” or “Pay Your Taxes By Debit or Credit.” However, if you have a lien placed, you’ll want to work with the IRS lien unit directly to make sure the lien is lifted as you pay everything off.
Checking for Tax Liens
Although the IRS can be helpful, they aren’t the only resource for finding out if you have a federal tax lien. Since liens are placed with local authorities, one of the best places to start is with your secretary of state’s website. Look for “lien filings” and your state name or “UCC search” and your state name. You’ll need to input identifying information like your filing number and your name to get the data you need.
There are also legal databases that provide access to information on property liens for a fee. Lexis Nexis’s RiskView Liens & Judgments Report is one of those databases. This gives creditors and consumers access to up-to-date information on tax liens, as well as providing a transparent dispute resolution process to make it easy to report incorrect information.
Look Up State Tax Lien
The IRS isn’t the only government agency that can place a lien on your property. States can also impose a lien if you don’t pay your local taxes in a timely manner. The process varies from one state to the next, but generally, you’ll check with the county in which the lien would have been recorded to find out if one has been placed. If the lien was placed on your home, you’ll check with the county in which that property is located.
As with the IRS, you’ll need to work with your state government offices to pay your back taxes and have the lien lifted. The process for this varies from one state to the next. In New York, you can use your online services account or call (518) 457-5434 to pay your tax bill. In California, you have a wide variety of payment options, including setting up a payment plan for a $34 fee. Once your tax debt has been paid, you can pull a copy of your credit report to see if the lien is still listed and, if so, contact relevant credit bureaus to have it removed.
The IRS Collection Process
The IRS wants taxpayers to know that it is happy to work with them on getting their taxes paid. There are several options available, including payment plans, that can avoid adverse action. Before placing an IRS tax lien, the IRS will send a notice to the mailing address on your tax return, disclosing the amount due plus penalties and interest, as well as requesting full payment of that amount. At that point, if you can’t pay, you can contact the IRS and work out a payment arrangement.
If you fail to pay that balance or make contact in some way within 10 days, the IRS will file a “Notice of Federal Tax Lien” on you. At this point, your creditors will know that the IRS has a claim against any property you own, including your home or your vehicles, and will continue to have a lien on any new property you acquire after that date. If you sell those properties, the IRS will be able to claim its funds before you pocket your share. If you sell your home for $150,000, for instance, and you owe $20,000 in taxes, in addition to the amount taken to pay off your mortgage, you’ll also owe money for the lien on that property at that time. These must be paid off before the new owner can take ownership of the property. If you try to sell your car, you can encounter problems selling it, which likely will make it easier to simply pay your taxes and remove the lien before approaching a dealership or private buyer.
Problems with Liens
The biggest danger of a lien is the harm it does to your credit rating. Any notice of federal lien is public record, which means potential creditors and the three credit bureaus have access to the information. Before 2017, the credit bureaus kept this information on your report indefinitely, but this information has now been removed from credit reports. For new tax liens, the bureaus will not use the information unless it contains the consumer’s name, address, Social Security number and/or date of birth. Information on the lien also needs to be refreshed every 90 days, so many taxpayers may find that liens don’t have the devastating effect they once did, especially if they can work to remove it.
Perhaps the most immediate problem with a tax lien, though, is that the IRS can actually seize property to recoup the money due. Most likely, though, you’ll run into an obstacle when you try to sell or refinance your home. Your lender will probably want you to settle that debt before you can close on the home. In most cases, you’ll simply pay the taxes due out of the equity you have in your home at closing. However, if you don’t have equity, this could put you in a financial pickle during a time when you don’t have an abundance of funds to spare. You may have saved for years to get the money for a down payment and closing costs, only to find you need to come up with another $20,000 to pay off your lien.
The Fresh Start Program and Liens
The IRS doesn’t want to permanently destroy taxpayers’ credit, but the agency is tasked with collecting the taxes that have been imposed. To give taxpayers more relief, the Fresh Start Program was rolled out in 2011 with the goal of making it as easy as possible for those who owe. One major part of this program was to set the threshold for which liens could be placed at $10,000 or more. So if your tax debt falls below that, you won’t have to worry about that part of things.
At the same time, though, the Fresh Start Program also came up with ways that the IRS can help taxpayers get that notice withdrawn. You’ll still owe the taxes that prompted the lien, but it will at least remove that stressor. There are two ways you can have the lien withdrawn: if you pay the debt in full or if you are actively paying your IRS debt down through a direct debit installment agreement.
Avoiding a Tax Lien
The best way to avoid a tax lien is to pay your taxes on time. Of course, this isn’t always a possibility. If tax season has arrived and you owe more than you can afford, it’s still important to file. Failing to file at all will result in much higher penalties than you’ll owe if you simply file and pay later. Remit payment for as much as you can afford by April 15 and pursue other options for the rest. The lower you can get your tax debt, the better off you’ll be once penalties and interest begin accruing. You’ll also reduce the risk of getting your tax debt above the $10,000 threshold at which the IRS will impose a tax lien.
For the taxes you can’t pay initially, the IRS recommends a loan or credit card to pay off the debt. These options will likely result in lower interest than the IRS will charge, and you can pay it back based on the lender’s timeline. However, if this isn’t an option, the IRS directs you to the Online Payment Agreement tool found on its website. To qualify, you’ll need to owe less than $100,000. There are fees associated with setting up a payment plan, but they’re lower than you’d see if you failed to pay altogether. Once in place, you can adjust your payment terms at any time. If you let your payment lapse, though, you’ll have to pay a reinstatement fee to get it going again.
Liens Versus Levies
As harmful as a tax lien can be if you plan to someday sell your home or take out a loan, a levy can bring even more obstacles. While a lien merely requires payment if you sell the item, a levy actually takes the funds due. The IRS has the right to go straight to a levy if you’ve ignored a payment demand. Before doing this, you’ll get a Final Notice of Intent to Levy and a notice of your right to a hearing. If you still fail to take action, after 30 days, the IRS may take funds from your bank account, levy your wages or may draw funds from your life insurance funds or commissions.
Instead of levying funds, the IRS could opt to seize assets and use the value of those to settle your tax debt. This may include your vehicles, your boat or your home. Even without a levy in place, the IRS has the right to “offset” funds you’re supposed to receive from other sources. If, for instance, you win the lottery, the IRS may take the portion of your winnings to pay the taxes you owe. Of course, you can also plan on having any refund you’re owed withheld until your back taxes are paid up.
- IRS: The IRS Collection Process
- CNBC: Here's what happens if you don't pay your taxes
- IRS: Understanding a Federal Tax Lien
- IRS: Paying Your Taxes
- Iowa Secretary of State: UCC Certified/Federal Liens Search
- Lexis Nexis: RiskView™ Liens & Judgments Report
- NY Dept. of Taxation and Finance: Convenient options for handling New York State Tax Business
- State of California FTB: Payment Options
- IRS: US Tax Center
- Tax Defense Network: IRS Tax Liens
- Experian: Here’s Why Your Credit Scores Could Jump This Week
- IRS: What if there is a federal tax lien on my home?
- SuperMoney: Need Help to Pay Back Taxes? The Fresh Start Program May Be Your Ticket
- IRS: Four Tips If You Can't Pay Your Taxes on Time
- IRS: Apply Online for a Payment Plan
- IRS: What is a Levy?
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.