A lien is a legal claim against a particular piece of property. Liens are typically used to secure payment of a debt (e.g., loans). A tax lien is a special type of lien that is filed by the government against the assets of an individual or entity who fails to pay their taxes. If an individual or entity refuses to pay their taxes, then the government may levy a lien on their assets.
If an individual or entity refuses to pay their taxes even after a lien has been placed, the government can seize the assets attached to the lien. If they sell them, they can recover some or all of what they owe.
Imagine you are a member of a limited liability company (“LLC”). The Internal Revenue Service (“IRS”) may file a lien against the LLC’s business property if it fails to pay its business taxes on time. They are called “IRS tax liens” or simply “federal tax liens.”
An LLC’s members are protected from liability and debts incurred by the business. However, the LLC itself is not, and the IRS (e.g., an agency of the federal government) may seize its property. Physical property such as equipment or inventory and intangibles, such as copyrights, trademarks, and patents, may be included.
A business must also pay state and local taxes and federal taxes. If the LLC fails to pay business taxes at the state and local levels, the state or local government may issue a state tax lien against its assets.
Another difference between state tax liens and federal or IRS tax liens is the amount of time that the government has to collect on a tax debt. It may take the IRS up to ten years to collect unpaid federal income taxes. However, a state agency only has up to three years to collect unpaid state income taxes.
Please note, however, that the above time limits may vary depending on the facts of a particular situation and the laws of a particular state. Some states do not enforce a three-year statute of limitations, while others impose a three-year or four-year deadline. As for federal taxes, by declaring bankruptcy, entering into an installment agreement with the IRS, or settling, you can suspend or reset the clock.
Lastly, suppose a tax lien has already been attached to assets, and the individual or entity continues to ignore a government agency’s demand for payment of taxes. In that case, the government agency may seize the items mentioned in the lien documents through a legal procedure called a “tax levy.” In a tax levy, assets are actually seized from the individual or entity.
What Is a Tax Lien Certificate?
The tax lien certificate allows an investor to collect on unpaid tax debt on a piece of real estate property. The investor may also be able to collect on other types of penalties and fees related to property tax debt. Tax liens are imposed by a local or state government if a property owner defaults on tax payments.
Tax lien certificates give the lien holder legal authority to collect on the tax debt, although the property owner is usually given some time to repay the debt. It is often referred to as the “redemption period.” A tax lien can lead to the lien holder foreclosing on the property and assuming ownership.
How Is a Tax Lien Certificate Obtained?
The government is responsible for property taxes, so tax liens are generally obtained through government actions. These are called tax lien sales or tax lien auctions. Investors can participate in these proceedings to obtain a tax lien certificate.
Benefits of Tax Lien Certificates
- A tax lien is generally viewed as a form of investment and a favorable one at that. Property tax interest rates are fixed and generally mandatory by law. Investors can expect favorable returns on their tax lien certificates due to these mandated interest rates.
- Tax lien certificates usually take precedence over other types of documents, such as mortgages.
Tax Lien Certificates: Disadvantages
- Tax lien certificates are usually purchased at full cost from the government, in one payment, or in a series of payments over a short period of time, typically one or three days.
- Tax liens have little to no secondary market, so the original lienholder may not be able to sell the tax lien certificate at a profit.
Do Tax Lien Certificates Cause Disputes?
Most tax lien certificate disputes are caused by errors made by the government when calculating tax debt rates or by fraud committed by the investor or other parties.
What Should I Do in Response to the IRS’s Action?
To ensure that a federal tax lien is completely removed, you should pay off the tax debt in full. The debtor can request to do one of the following if payment is not possible:
- Establish an installment payment plan;
- Complete the online payment agreement application;
- Request a compromise from the IRS by reducing the amount owed; or
- Ensure the IRS has placed a notice on the debtor’s account that says they are currently unable to pay and that there is a temporary delay in collection.
Tax lien notices from the IRS should never be ignored, regardless of the method chosen.
Overdue taxes can result in a number of serious penalties if you ignore them or refuse to pay.
It can be difficult to obtain loans and other lines of credit when you have a tax lien. This means that the debtor will have difficulty doing certain things, such as buying or selling a house.
If the lien documents contain property, the IRS may issue a Notice of Levy. Tax debt can be satisfied by seizing the properties listed in this notice. Selling the debtor’s property is one way the IRS recoups tax debt. When the amount recovered is less than what the debtor still owes, the debtor will need to find another way to make up the difference.
The IRS may also take collection actions (such as summoning third parties to determine a debtor’s ability to pay or garnishing wages directly from a debtor’s paycheck).
The IRS may also require the debtor to pay the penalty for some unpaid employment taxes.
In extreme cases, a debtor’s passport application may be denied, or their passport may be revoked.
Are There Any Forms of Tax Settlement Available?
A debtor can settle a property tax lien in several ways. The following forms of tax settlement may be available to a debtor:
- Negotiating and compromising with the IRS to reduce the debt;
- Developing an installment plan for paying off the debt still owed over a certain period of time;
- Extending the deadline for debtors who are actively serving in the military;
- Demonstrating that the debtor’s current obligations would place a serious burden on them or cause them undesired hardship;
- Extending the due date for a reason beyond the debtor’s control, such as death or illness;
- Review marital documents (e.g., postnuptial agreements) for evidence that shows the debtor’s spouse violated tax laws and failed to make payments.
How Can a Tax Lien Certificate Help Me?
A tax lien certificate is a powerful investment tool to generate high returns. They are, however, complicated instruments that typically require the assistance of a lawyer. You may need to hire a qualified tax lawyer in your area if you need help obtaining a tax lien certificate. If you need to file a lawsuit regarding a tax lien, an attorney can advise you on the best course of action and represent you in court.