Posted On July 19, 2018
Were You Hit with a Tax Lien? (Here’s What You Need to Know)

Were You Hit with a Tax Lien? (Here’s What You Need to Know)

Taxpayers who have been hit with a tax lien need to understand what it means, what it implies for their future, and what options they might have. Tax liens can have serious repercussions for credit scores, personal property, and businesses debtors might own.

What Is a Tax Lien?

A tax lien is a legal claim against the taxpayer’s property. When a taxpayer fails to pay a tax bill or make a plan to pay a balance owed, the IRS can collect on the debt through a tax lien. When the property sells, the IRS will receive the proceeds as payment for the taxes owed.

What Property Is Connected to a Tax Lien?

A tax lien can be placed on all types of property, but real estate is the most common. If the taxpayer sells a vehicle or other personal property, the IRS can collect from the proceeds if a lien is in place. Financial assets and businesses that the taxpayer owns can also be subjected to tax liens.

A lien does not mean that the taxpayer is required to sell the asset. Rather, it means that the asset’s proceeds, when the taxpayer decides to sell, go to the IRS first.

How the Tax Lien Affects Credit Scores

Tax liens are part of a taxpayer’s public record, and therefore may impact credit scores. However, in 2017 the credit reporting agencies eliminated about half of all tax liens from credit reports. As a result, fewer consumers are burdened by negative marks caused by federal tax liens. Those who have tax liens in their financial history should check their credit reports to see if a lien has lowered their scores.

Removing Tax Liens from the Public Record

The only way to remove a tax lien is to pay the tax debt in full. The IRS releases tax liens within 30 days of receiving the payment for the bill. However, the lien will remain on the credit history for up to seven years after paying it. If a taxpayer finds a lien that may have been paid, but is still on the credit history, a tax professional can file a Freedom of Information Act request to get more information about the lien. Contacting the IRS directly is never recommended, as doing so can open a full IRS investigation, creating even more problems.