In a NutshellYou have multiple options for paying your federal income taxes. Likewise, the IRS has recourse when you don’t pay your taxes. Tax liens and tax levies are two ways the IRS can get money out of Americans who owe delinquent taxes. Here’s how each works.
This article was fact-checked by our editors and reviewed by Christina Taylor, MBA, senior manager of tax operations for Credit Karma. It has been updated for the 2020 tax year.
Failing to pay your federal income taxes can have severe repercussions.
Not only will the IRS likely charge penalties and interest on the balance you owe, but the service can enforce collection with a tax lien or tax levy. Let’s look at what each is, how they work and what you can do if you’re facing either.
- What is a tax lien?
- How does a tax lien affect me?
- What is a tax levy?
- How do I know if I have a tax lien or levy?
- How can I resolve a tax lien?
A tax lien is the federal government’s legal claim against your property. The IRS can put a tax lien on your property if you neglect or refuse to fully pay a delinquent tax debt.
A tax lien doesn’t force you to sell property in order to pay your taxes. But it ensures that when you do sell, the IRS has dibs on the proceeds as payment for the taxes you owe.
Tax liens can affect all property you own, including your home and other real estate, your vehicles and other personal property, even financial assets and any business property you might own. Plus it can attach to assets that you purchase after the IRS issues the lien but before you pay to settle it.
“In the simplest of terms, a tax lien is a last-resort action used to secure payment of individual or business taxes,” says Michael Raanan, an IRS-enrolled agent, former IRS revenue officer, and president of Landmark Tax Group in Irvine, California.
When the IRS sends you a bill, but you neglect or refuse to pay it, it will next send Letter 3172, Notice of Federal Tax Lien Filing and Your Rights to a Hearing Under IRS 6320. If you don’t agree with the lien, you have 30 days from the date of the letter to request an appeal. Instructions for requesting an appeal are included in the letter.
If you miss the deadline for requesting an appeal, you can file a request on Form 12153 for an Equivalent Hearing. But this type of hearing doesn’t block a tax levy, suspend the 10 years the IRS has in which to try collecting your debt, or allow you to go to court to appeal any decision by the IRS Office of Appeals.
The IRS files the Notice of Federal Tax Lien with local government authorities, such as the secretary of state or county recorder in the county where you live, conduct business or own property. The lien doesn’t specify which property it affects — it automatically applies to all real estate and personal property and all future assets you may acquire during the duration of the lien.
And because it attaches to all your assets, it can impact your ability to sell or refinance your property and manage your business. Plus in many cases, a federal tax lien can’t be discharged in bankruptcy.
Tax liens no longer affect credit
There is some good news about tax liens. Credit-reporting agencies used to include tax liens on credit reports, which could negatively impact credit scores. But in 2017, the three major consumer credit bureaus — Equifax, Experian and TransUnion — changed some of the rules on the public records they include in credit reports.
The National Consumer Assistance Plan, launched by the three credit bureaus, eliminated the inclusion on credit reports of consumer debts that didn’t arise from the consumer entering a contract or agreement to pay. So debts like traffic tickets, fines or tax liens no longer appear on credit reports.
The next step after a lien is often a federal tax levy.
“Once the government’s interest in your property is secured,” Raanan says, “the government can levy or seize your property as a means of collection. The IRS is notorious for issuing levies on bank accounts and wages if they don’t hear back from a taxpayer in time, or if requested documents are not received.”
It’s important to understand that a tax lien is different from a tax levy. A lien gives the IRS the authority to make a claim against your assets. For instance, if you owe back taxes and put your home up for sale, a lien establishes that the IRS has first claim on any proceeds from the sale of your house.
A levy is a separate action by which the government actually seizes your property or assets to satisfy a tax debt you’ve failed to pay. For instance, the IRS may levy your bank account, withdrawing the amount needed to satisfy your tax debt. It doesn’t matter if you planned to use the money in your account to pay your mortgage or make a car payment. By way of a federal tax levy, the IRS has the right to seize the funds as payment for what you owe prior to anyone else’s claim.
Tax liens and levies are serious issues, but they don’t happen unexpectedly. The IRS won’t issue either without giving you warning.
The IRS sends a demand for payment and then mails the notice of federal tax lien after the lien has been filed. If your bill remains unpaid and no other arrangement has been made, the IRS then sends you a Notice of Intent to Levy and Notice of Your Right to a Hearing. Despite these notices, it’s not uncommon for taxpayers to have an active lien or levy and be unaware of it because the notice was lost in the mail or sent to a former address.
“Taxpayers sometimes learn of a tax lien while attempting to refinance or sell a home,” Raanan says. “While an existing tax lien can be discovered during the title search or a visit to the county recorder’s office, the best way to determine if an IRS tax lien has been filed is to check with the IRS itself.”
If you owe the IRS taxes, and you haven’t made other arrangements to deal with the debt, it might be worth checking to see if you are subject to a federal tax lien. You can find out by calling the IRS’s Centralized Lien Unit at 1-800-913-6050 or authorizing your tax professional to call on your behalf.
Beyond federal tax liens and levies, you may be subject to state or local liens and levies as well. Your state’s secretary of state office as well as your county recorder’s office are good places to start when looking for any state or local liens or levies.
You can avoid ever facing a tax lien or levy by simply paying your taxes in full and on time. If you can’t pay in full, reach out to the IRS to make other arrangements rather than risk a lien or levy.
If a lien has been filed, you have options for getting rid of it.
- Pay the full amount you owe right away. The IRS will release the lien within 30 days of receiving your full payment.
- Ask to have the lien discharged from certain property. The IRS allows this under very specific circumstances. For example, you can’t sell your house if there’s a tax lien against it. But if selling it could give you the money you need to pay your taxes, the IRS might agree to discharge the lien.
- Generally, a tax lien takes precedence over other creditors. But under certain circumstances, the IRS could agree to let other creditors move ahead of its claim. For example, you can’t refinance a mortgage with a tax lien against your property. But if refinancing would allow you to pay your taxes, or increase an amount you’re already paying, the IRS might agree to subordinate its claim on your property.
- Finally, withdrawal of the lien removes it from your property, but still leaves you liable for the amount you owe. The IRS may agree to withdrawal for several reasons. For example, if you’re up to date with your payment agreement or if withdrawing the lien will allow the IRS to collect the tax you owe.
Of course, for some taxpayers facing financial troubles, paying their tax bill in full may not be an option. In that case, Raanan recommends taxpayers under threat of a tax lien or levy immediately seek assistance from a licensed tax-relief professional to discover a possible plan of action.
That plan may include setting up an installment agreement, working out an offer in compromise, or persuading the IRS to classify your account as “currently not collectible.” Though you may still see penalties, interest, fees or additional financial consequences with some of these options, they’re alternatives to facing the financial fallout from a tax lien or levy.
If you can’t pay your tax debt in full, don’t ignore the situation. Respond immediately to any letter you receive from the IRS. Try to work out a payment plan if you can; it may allow you to avoid a federal tax lien or levy, although you’ll still likely face interest and possibly penalties.
If you do face a tax lien or levy, a tax professional might be able to help you dispute a tax lien that’s been filed in error, or help you create an effective plan of action to get your tax problems handled and move on with your life.
Relevant sources: IRS: Understanding a Federal Tax Lien | IRS Publication 594: The IRS Collection Process | IRS: Letters and Notices Offering an Appeal Opportunity | Department of Treasury – Internal Revenue Service Form 12153, Request for a Collection Due Process or Equivalent Hearing | Taxpayer Advocate Service: Levies | IRS: Apply Online for a Payment Plan | IRS Form 656 Booklet, Offer in Compromise
Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.