If you had trouble scraping up enough to pay your taxes in full, you might have heard from the federal government already. Understanding tax liens can be confusing, so we've put together answers to some of the most frequently asked questions to help you navigate this complex topic with confidence.

The IRS likes to get the full amount of taxes owed quickly, on Tax Day if possible. If it isn’t possible, and you didn’t file for an extension to let them know payment would be late, the feds have a tool they like to use to encourage payment of tax debt. It’s called a tax lien.

There is a bit of confusion about what tax liens are and the impact on the typical taxpayer. So we put together this little FAQ to help everyone understand.

What Is a Tax Lien? Is It the Same as a Tax Levy?

A tax lien is a legal claim the IRS places against your property if you fail to pay a tax debt. It protects the federal government's interest in your property, and it can be placed against real estate, personal property, or financial assets.

By protecting, the IRS means it can prevent you from selling that property and seize it for themselves if you don’t pay up.

A tax lien is not the same as a tax levy. A lien is a legal claim against a property, sort of like labeling the property as collateral. A tax levy allows the IRS to take your stuff.  

A levy gives the government an interest in your property if you don’t pay your taxes and allows the IRS to take that property to pay the debt. In essence, a levy is what happens if you can’t remove the lien by paying off your tax debt.

If anything good can come of a levy, it’s that a federal tax levy is not a public record and shouldn't affect your credit report.

Does the IRS Let People Know If It Places a Tax Lien?

Yes, it does. The IRS sends out a letter called a Notice and Demand for Payment. That’s a pretty clear label, isn’t it? Once your tax liability has been assessed, you will receive a bill from Uncle Sam telling you how much you owe and what will happen if you don’t pay it.

Then the IRS files a public document called a Notice of Federal Tax Lien right out where creditors can see it. They know the federal government now has the right to your property that supersedes their own interest. You receive a copy as well. The notice shows up on your credit profile and can cause problems down the line. 

Which leads to the next question.

How Does a Tax Lien Affect Me?

If you have a tax lien against any property, the Notice of Federal Tax Lien will be visible to financial institutions. That lien can prevent you from getting a good interest rate on a loan. It may prevent you from getting a loan at all. 

A lien attaches to all of your assets as well as any future assets you may acquire while the lien is in force. It can limit your ability to get credit. A lien against business property includes all accounts receivable. And if you file for bankruptcy, the tax lien can remain with you along with the tax debt and the public notice. 

A tax lien also affects your credit score. Even after the lien is released (because you paid it off or for another reason), your credit report will show a record of your tax lien for up to 10 years. 

One more thing. Don't rely on the IRS to update your tax lien's balance, as listed on the notice. It won't. Contact the IRS to obtain a letter showing your current payoff amount.

How Do I Get Rid of a Lien?

The best way to get rid of a lien is to pay your tax debt in full, including all interest, fees, and penalties. About 30 days after the balance is paid, the IRS will release the lien. The federal government should notify you that the lien has been released, but if you don't receive anything, ask for a release.

Other ways to get rid of a lien include the following:

• Discharge of property - removes the lien from a specific property as determined by eligibility. A discharge can help you sell a property or obtain a loan to pay your tax debt.
• Subordination - allows other creditors to jump in line ahead of the IRS to receive payment. It may be easier to get a loan or mortgage with a subordination (also subject to eligibility).
• Withdrawal - removes the public Notice of Federal Tax Lien and lets other creditors know they are not in competition with the IRS for your property. You are still liable for the tax debt, though. Again - eligibility applies. 

The 2011 Fresh Start Initiative provided two other withdrawal options. One may allow a withdrawal of your notice after the lien is released - you know, so it isn’t on your credit record for years to come. The other may allow the notice to be withdrawn if you set up a Direct Debit Installment agreement or converted an existing installment agreement to Direct Debit.

How Can I Avoid a Tax Lien?

Avoiding a federal (or a state) tax lien is pretty straightforward. Pay your taxes. On time. In full. 

Barring that, let the IRS know you can’t pay on time and file for an extension. You get yourself six months to get your taxes and payment together. You will owe some interest on your tax debt, but then you avoid a lien.

Another way to avoid a lien is to acknowledge you can’t pay in full all at once and enter into a payment agreement with the IRS. You will continue to accrue interest on your unpaid tax debt, but you could get up to 72 months to pay it all off.

Never. Ever. Ignore. Letters. From. The. IRS. Ever. 

Anything the federal government sends you, you deal with ASAP. All correspondence gives you options for contacting the IRS to work things out. Burying anything under a pile of other bills won’t make it go away. 

If you missed filing or paying your taxes or already have a lien against any property, contact Top Tax Defenders. We have lots of experience untangling tax knots.