What’s the Effect of a Tax Lien?

Know How Tax Liens Impact Your Finances

Buying and owning your home can be a dream. It can be used to raise a family, or can be used to rent out the rooms and live of the rental payments.

But a big enough tax debt can lead to your home being targeted by the IRS through an IRS tax lien. The IRS uses tax liens as one of many tools to get back tax debt paid. They’re used selectively, but are a powerful tool used to get taxpayers current with their tax bills.

While a tax lien may seem complicated and scary, they’re quite simple. It’s essentially a security interest in your property. If your home has some equity to it, tax liens prevent you from enjoying it.

But how does a tax lien affect you? Some homeowners who let the back tax debt linger think a tax lien won’t have an impact, but the truth is that a federal tax lien dings your financial future.

An IRS tax lien can even affect more than just a home; it can attach to vehicles, securities, and business assets. If it attaches to your business then your rights to your business property will be compromised, including any accounts receivable.

But the biggest effect of an IRS tax lien is on your credit.

A tax lien is up there with not paying your bills when it comes to credit reports. If the lien isn’t released, it’ll damage your credit report for seven years.

That’s because tax liens are formal documents filed in court. A Notice of Federal Tax Lien filed in a courthouse is a public document that everyone, including credit reporting agencies, will be able to see.

You may have some time after the lien is filed where no one will notice, as tax liens aren’t reported to the credit reporting agencies (the IRS can’t do that). But after the credit reporting agencies (or inquisitive people) notice the public filing, it inflicts major damage to your credit score and can prevent you from getting credit.

Another effect of a tax lien on your home is that any sale proceeds are reduced by the lien amount (which is generally the amount of unpaid back tax debt).

The IRS can also show some mercy to tax debtors. It can remove a tax lien if the home is sold for less than the lien amount, and it can also make the tax lien secondary to a lender’s lien if the back tax debtor wants to refinance or restructure his or her mortgage.

But if you want to keep your credit score top-notch, avoiding a federal tax lien is more important than you think.

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