Types of Tax Liens: Federal Tax vs. Property

Types of Tax Liens: Federal Tax vs. Property


As a CPA, tax professional, or enrolled agent, understanding the different types of tax liens is crucial when assisting clients with tax resolution matters. In this informative article, we’ll provide a thorough examination of the two primary types of tax liens: federal tax liens and property tax liens. By gaining a comprehensive understanding of these critical distinctions, you’ll be better equipped to guide your clients through the complexities of tax resolution and offer tailored solutions that suit their unique circumstances. Let’s dive into the world of tax liens and explore the nuances of federal tax liens versus property tax liens, empowering you with the knowledge and expertise to effectively navigate and resolve tax-related issues for your clients.


Federal Tax Liens vs Property Tax Liens

When a tax lien is imposed it indicates a legal claim against property for the purpose of satisfying a tax delinquency. Tax liens are issued to secure payment of federal and property tax delinquencies.


Federal Tax Lien

When the IRS assesses taxes, they send a bill to alert the taxpayer. If upon receiving the bill the recipient neglects or refuses to pay, a lien is issued against his or her property. The IRS then files a Notice of Federal Tax Lien to alert creditors that the government has a legal right to confiscate the property.


When filed, the Notice of Federal Tax Lien is a public document that alerts other creditors that the IRS is asserting a secured claim against the delinquent tax payer’s assets. The property owner has the right to appeal if the IRS advises him or her of the intent to file the document.


Is there a difference between a lien and a levy? Yes!


When a tax lien is filed by the government, the property owner still owns the property, whereas in the case of a levy, a legal seizure of property is made to satisfy the tax debt.


Property Tax Lien

Officially referred to as a tax defaulted property lien, it can be imposed on buildings, vacant land, homes, boats and other personal property. Depending on state guidelines, one of two things happens.


In some states, for instance Arizona and New Jersey, tax lien certificates are auctioned off to investors to satisfy the property owner’s tax delinquency. The price of the tax lien certificate equals the tax bill.


Contrary to what some people assume, purchasing the tax lien certificate doesn’t give an investor immediate ownership of the property. During what is called the redemption period, the existing property owner is given the opportunity to pay the tax bill along with ancillary fees and interest.


Deed States

In states such as California and Texas, the deed to the property is auctioned off. Does this mean that a person can lose his or her home simply because of a property tax delinquency? Absolutely—and the bill doesn’t have to be a large one. Although uncommon (about 5%), people lose their homes, some for less than $100, by failing to pay their taxes and penalty fees before the end of the redemption period.


Lien States

In lien states, tax lien certificates are sold to investors, who hold the certificates until property owners have their day in court. Just as in deed states, about 95% of people redeem by the deadline; sometimes on the steps in front of city hall. But the investors still get a pretty good deal—their original investments are repaid plus 16%-35% interest.


If properties are not redeemed by the deadline, again depending on state guidelines, the tax lien certificate holder may obtain the deed to the property. Thus tax lien certificate investors can purchase property—homes, buildings and vacant land—for pennies on the dollar.


Why doesn’t the county sell the tax defaulted properties themselves? They would surely make more money. There are a couple reasons.


Trying to manage the properties would be a paperwork nightmare. The county is not in the real estate business. They only want the revenue due to pay for the services they support: schools, hospitals, road repair, etc. Investors are actually doing the government a favor by taking these tax defaulted properties off their hands while providing income and community support.


Members: in case you missed the October Case Study Call, we discussed the difference between a lien and a levy in detail. The recording is available for review in the member area. If you are not a member and would like more information, please visit https://IRSSolutions.com for information on our software and monthly case study calls.

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