A federal tax lien is the government’s first line of defense against tax delinquencies. When your clients neglect or fail to pay a tax debt, the federal government doesn’t just stand back and take it. It defends its interest by imposing a federal tax lien. The lien represents the government’s legal claim against the taxpayer’s property; including real estate, personal property and financial assets.
There are three qualifying features of a federal tax lien. It exists when the IRS:
- Puts the balance due on the books, i.e. assesses liability
- Sends a bill explaining what is owed – Notice and Demand for Payment and the taxpayer
- Neglects or refuses to fully pay the debt – on schedule!
The process begins as the IRS files a Notice of Federal Tax Lien with the county recorders office or secretary of state. This puts the public on notice that the IRS is exercising its right to the taxpayers’ interest in their property. The notice also alerts creditors that the government has a legal right to the property. It serves as a heads up to buyers or acquirers of the taxpayer’s assets that they need to move over and make room because the government has an interest in this property.
NOTE: If there is a property tax lien against any real estate owned by the taxpayer it supersedes the federal tax lien. Interesting, isn’t it?
How a Lien Affects the Taxpayer
Assets: A lien attaches to assets such as property, securities, vehicles, and to future assets acquired during the duration of the lien.
Credit: Once the IRS files a Notice of Federal Tax Lien, it may limit the taxpayer’s ability to get credit.
Business: The lien attaches to all business property including all rights to business property and accounts receivable.
How Can You Help?
You can help in a BIG WAY by informing your clients that they can avoid a federal tax lien by simply filing and paying taxes in full, and on time. Let’s be real. Things happen and life sometimes gets in the way.
If a taxpayer can’t file or pay on time, advise your clients not to ignore the letters or correspondence they get from the IRS. The letters won’t disappear if they’re ignored or stacked on a shelf with junk mail. Now, the IRS isn’t going to pull into the driveway with a UHAUL, but denial will only get your client into deeper trouble. Remind them if they can’t pay the full amount owed, payment options are available to help settle their tax debt over time.
What’s the Difference Between a Lien and a Levy?
Many people get this confused, but a lien is not a levy. A lien secures the government’s interest in property when taxpayers don’t pay their tax debts. A levy actually confiscates the property to pay tax debts.
If taxpayers don’t pay or make arrangements to settle their tax debt, the IRS can levy, seize and sell any type of real estate or personal property. There’s only one way to get rid of a federal tax lien. PAY THE DEBT IN FULL. The IRS releases the lien within 30 days after the debt is paid.
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