Describing a Tax Lien
The first big step taken by the IRS against those who have not paid their back taxes is a tax lien. When the IRS uses a tax lien, they are legally allowed to claim property belonging to you as payment or security for your current tax debt. It protects the interest of the government in your assets.
When does the IRS file a tax lien and why?
Individuals with back taxes that remain unpaid, and do not cooperate with the demand for repayment given by the IRS for the amount owed, are likely to be given a tax lien from the IRS to recoup money owed.
The process works in a regimented manner. The first step of the IRS is to send you an official assessment letter describing your current tax liability. This letter notifies you of the amount in unpaid back taxes you still owe, as well as any penalties and interest you have incurred as a result of nonpayment.
If you decide to ignore the assessment letter, the IRS will pursue that letter with four different notices: CP 501, CP 502, CP 503, and CP 504. The tone of each letter becomes more demanding in succession and the amount owed continues to climb as additional penalties and interest get added on.
CP 504 is the first time the IRS mentions that it has an intention to levy. If there is still no response from the taxpayer after the mailing of these letters, the IRS comes to the conclusion that they will not have the ability to obtain payment for back taxes in a conventional manner, and they, therefore, then decide to file a Notice of Federal Tax Lien (NFTL). If this letter is in your possession, you can be assured that there is already a lien on your property. The lien was created to stop you from borrowing or selling against any assets you own. The tax lien provides the IRS with a legal claim over the property specified by the lien, thereby removing your rights.
Tax lien consequences
When you have a tax lien placed against you, it makes it very tricky, if not impossible to obtain credit for large purchases, including automobiles and property. A tax lien set up by the IRS is financially crippling because it disallows you from holding any assets that are in your name. You are forced to depend on others for financial assistance since the lien is also placed on your credit report.
Creditors, such as your mortgage lender, are also notified that there is a tax lien on you. A tax lien stays, on your credit report provided that the IRS is legally able to enforce this action against you. They can enforce this up to ten years, at which point the statute of limitations expires. The other way the IRS provides to remove the tax lien occurs when you decide to settle your tax liabilities and contact the IRS to set up an appointment.
If you choose to ignore the tax lien placed on your property, eventually the IRS decides to seize all your assets and offer them up for private or public sale. When the IRS does begin to seize assets in an effort to satisfy your back tax liability, it is called a tax levy. When it comes to collecting taxes, tax levies are considered the most lethal, destructive weapon the IRS possesses.
What can you do when there is a tax lien?
If a tax lien currently controls your property, it is optimal to take immediate action. Do not attempt to wait for the statute of limitations to expire. It can be assumed that before the ten years are up, the IRS will have already placed a tax levy on your assets and begun to seize them in an effort to recoup tax liabilities.
If you want to release the tax lien, you need to file your tax return or file any owed back taxes. Once you do this, you can work with the IRS to locate the best method to pay back taxes. Payment of back taxes can either be done in full or through the use of a settlement method.