Tax Liens 101 (Part 1): What Happens During an IRS Tax Lien?

If you’re reading this, it’s not too late!

You may think you’ve hit the end of the road or that your tax debt has spun out of control. Maybe you think you’re in too deep or you received a letter telling you the IRS is going to place a tax lien on your property.

Maybe you’re right, and maybe you’re wrong! But, here at StopIRSDebt.com, we don’t think that tax debt needs to be so scary.

In fact, we think the best way to deal with the IRS is with confidence, which is why we work so hard to walk our clients through their conflicts with the IRS and make sure they understand their financial situations and feel comfortable taking on the IRS.

Most taxpayers have a pretty basic understanding of most tax terms, but not all that much. So, what happens when you combine a pretty rudimentary knowledge of tax issues with intimidating letters from the IRS and a mounting pile of tax debt?

Well, let’s just say that when you’re feeling stressed out and overwhelmed, that rudimentary tax knowledge doesn’t take you all that far.

We’re on a mission to change that.

Welcome to IRS Tax Liens 101.

The best way to approach the IRS is armed with knowledge, so we’re here to walk you through everything you need to know in a two-part crash course on IRS tax liens.

Today, we’ll be tackling the common question, “What happens during an IRS Tax Lien?” and everything that comes with it. Get ready for all the basics, from definitions to simple explanations.

The first step to getting out from under the IRS is to know exactly what you’re dealing with in the first place—so let’s get started!

What Is a Tax Lien?

Tax lien has to be one of the most misunderstood tax terms out there, but it’s a lot easier to get a grasp of than you might realize. Let’s start by defining “lien” and working from there:

Lien – A right to keep possession of property belonging to another person until a debt owed by that person is discharged.

Liens can be found just about anywhere, from auto loans to mortgages—and yes, to IRS debt. Essentially, liens give someone the right to take ownership of a piece of property until somebody pays off the debt on that property.

For example, if you take out a loan to buy a new car, your bank will place a lien on that car. If you default on that loan, that lien gives your bank the right to repossess the car. In many ways, it’s a protection for the lender; should someone stop making payments, they’re not completely out the money because they have the car.

Now, tax liens are just a specific type of lien, so they work in a similar way. There are two crucial differences:

  1. A tax lien doesn’t come from a loan, but instead from tax debt.
  2. The lien holder isn’t a bank or a lender, but instead the IRS.

Essentially, the IRS uses a tax lien when a taxpayer racks up tax debt and doesn’t pay. It gives the government a legal claim against your property when you don’t pay a tax debt.

How Does the IRS Decide to Place a Tax Lien?

Well, we just sort of talked about this—but the IRS won’t file a tax lien if your taxes are current. But they won’t just place a lien on your property the minute you’re behind on your taxes! Here’s how it works, according to the IRS:

First, the IRS assesses your liability by putting your balance on the books. From there, they’ll send you a bill explaining how much you owe. This is called “Notice and Demand for Payment.”

Once you’ve received the Notice and Demand for Payment (often when our clients contact us), the ball is in your court. If you pay the debt in full, negotiate the debt, or work out a payment plan, you’ll avoid a tax lien all together!

However, if you don’t pay the debt, the IRS will file a lien.

What Happens When the IRS Files a Lien?

If you don’t pay your tax debt, the IRS will file a public document called the “Notice of Federal Tax Lien,” which will let any creditors know that the government has a legal right to your property.

4 Ways a Lien Affects You

Before the IRS files a Notice of Federal Tax Lien, the matter is between you and them. However, once the IRS files the notice, your lien is public knowledge and can impact you in a ton of ways you may not even expect.

  1. A tax lien attaches not just to your home but also to all your current assets, from vehicles to stocks and beyond. It also attaches to any future assets you may acquire during the lien.
  2. Tax liens can severely harm your credit score and limit your ability to get new credit. So new credit cards or loans may be off the table entirely for you.
  3. If you own a business, the tax lien also attaches to any business property—including accounts receivable!
  4. While filing for bankruptcy is often a last-ditch effort to get out of certain overwhelming debts, it may not work with a tax lien. Tax debt and your Notice of Federal Tax Lien may still hang over your head.

Liens vs. Levies

Some people mix up liens and levies, so let’s take a moment to clear that up.

As we’ve talked about, liens give the government a legal claim against your property because of your tax debt. Levies, on the other hand, give the government the right to take the property in order to pay that debt.

During an IRS tax lien, the government will have a claim against your property, but they won’t take your property right away. You’ll have some time to pay your tax debt or make arrangements with the IRS to settle it.

If you don’t, that’s when the IRS can levy, take, and sell any of your property they may see fit to cover your tax debt.

How Do I Stop an IRS Tax Lien?

Knowledge is your first tool against the IRS. Now that you have a good understanding of IRS tax liens, it’s time to talk about stopping them in their tracks—which is a whole separate discussion we’ll leave for part two of our Tax Liens 101 series, “How Do I Stop an IRS Tax Lien?

We’ll see you there!

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