In general, a lien is a legal claim to a particular item 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. Thus, if an individual or entity refuses to pay their taxes, then the government may impose a lien on their assets.
If an individual or entity refuses to pay their taxes even after a lien is in place, then the government can seize the assets that the lien is attached to. They can then sell them to recoup some or all of the payments still owed.
For example, suppose you are a member of a limited liability company (“LLC”). If the LLC has failed to pay its business taxes on time, then the Internal Revenue Service (“IRS”) may file a lien against the business property. These are known as “IRS tax liens”, or more simply, a “federal tax lien”.
Although members of an LLC are personally protected from liability and debts incurred by the business, the LLC itself is not and thus the IRS (e.g., an agency of the federal government) may seize its property. This may include physical property, such as equipment or inventory, or intangible property like copyrights, trademarks, and patents.
In addition to federal taxes, the business must also pay any state and local business taxes. If the LLC failed to pay business taxes at the state and local level as well, then a state or local government agency may issue a state tax lien against assets that belong to the LLC.
Aside from the level of government, one other significant difference between state tax liens and federal or IRS tax liens is the amount of time that a government agency has to collect on a tax debt. Specifically, the IRS may have up to ten years to collect on unpaid federal income taxes. On the other hand, a state agency only has up to three years to collect on unpaid state income taxes.
It is important to note, however, that the above time limits may vary based on the facts of a particular situation and on the laws of a specific state. For instance, some states do not enforce a three year statute of limitations, whereas others impose a three and a half or four year time constraint. As for federal taxes, you may be able to suspend or reset the clock by either declaring bankruptcy, entering into an installment agreement with the IRS, or reaching a settlement.
Finally, if a tax lien is already attached to the assets and the individual or entity has continued to ignore a government agency’s demand for payment of taxes, then the agency may seize the items contained in the lien documents by using a legal procedure known as a “tax levy”. Tax levies refer to the actual act of seizing the individual or entity’s assets.
How Should I Respond to the IRS’s Action?
The safest and best way to ensure that a federal tax lien is completely removed is by paying off the tax debt amount in full. If payment is not possible, then the debtor can request to do one of the following:
- Set-up an installment payment plan agreement;
- Complete the application for an online payment agreement;
- Contact the IRS and ask if they would be willing to compromise by reducing the amount of debt owed; or
- Check to see if the IRS placed a notice on the debtor’s account that says they are currently unable to pay and that there is a temporary delay on collection.
Regardless of the method selected, a debtor should never ignore a tax lien notice from the IRS. Refusing to pay or ignoring a demand to pay overdue taxes can result in a number of serious penalties. Some consequences of an unpaid tax lien include:
- A tax lien can make it difficult to obtain loans and other lines of credit. This means that the debtor will have a hard time doing certain things, such as purchasing or selling a house.
- The IRS may issue a Notice of Levy on the property contained in the lien documents. This notice will allow the IRS to seize the property listed, so it can satisfy the tax debt. One of the ways the IRS recoups tax debt is by selling the debtor’s property. If the amount recovered is less than the amount that the debtor still owes, then they will need to find another way to make up that difference.
- The IRS may also enforce collection actions (e.g., summoning third parties to determine a debtor’s ability to pay or garnishing wages directly from a debtor’s paycheck).
- In some cases, the IRS may also require the debtor to pay a penalty for certain unpaid employment taxes.
- Lastly, in extreme cases, a debtor may have their application to obtain a passport denied or the government may revoke a passport that they currently hold.
Are There Any Forms of Tax Settlement Available?
There are several ways that a debtor can attempt to settle a property tax lien. Some forms of tax settlements that may be available to a debtor include:
- Negotiating and compromising with the IRS to reduce the amount owed;
- Drafting an installment plan agreement to pay the debt still owed over a certain period of time;
- Requesting an extension for debtors who are actively serving in the military;
- Demonstrating that the debtor genuinely requires an extension because currently making payments would place a serious burden on them or cause undue hardship;
- Asking for an extension based on a reason beyond the debtor’s control, such as death or a medical condition; and
- Reviewing marital documents (e.g. postnuptial agreements) for evidence that shows the debtor’s spouse was responsible for violating tax laws and failing to make payments.
The above list is meant to provide some of the most common methods that debtors generally claim, but there are a number of others that a debtor may be able to use. To learn more about tax settlements and alternative options, a debtor should contact a local taxation lawyer for further legal advice.
Taxation lawyers are already familiar with the tax lien process and forms of acceptable options. Thus, they may be able to provide expert insight and options that are better suited to a particular debtor’s needs.
How Does Bankruptcy Affect a Tax Lien?
Bankruptcy is a type of legal proceeding that an individual or entity may use to have certain debts against them reduced or discharged. If a debtor manages to successfully file for bankruptcy, then any parties they are indebted to must stop their collection efforts. Thus, if the IRS or a state government agency issues a tax lien against a debtor’s property and the debtor declares bankruptcy, then the agency will be required to remove the tax lien on the property.
Once a debtor completes the bankruptcy process, however, a government agency may be able to impose a new lien on the debtor’s property. In this instance, filing for bankruptcy serves as a temporary way to hold off the seizing of the debtor’s assets.
Finally, although it is not necessary to hire a taxation attorney to assist with this process, it is strongly recommended that a person seeking relief through bankruptcy retains one. There are many different types of bankruptcy filings and failing to comply with the proper rules can lead to serious consequences. Accordingly, hiring a taxation attorney can prevent these consequences from occurring.
Will the IRS Accept My Reason for Failure to Comply?
As an agent of the federal government, the IRS expects all citizens to pay their taxes in full and on time as well as will hold each citizen accountable if they fail to do so. Although an individual who receives a tax lien from the IRS should never ignore its contents, there are some instances where they may be able to request a hearing in which they can offer a reason for failing to comply with the notice.
Some reasons that may be acceptable for not complying with a tax lien include:
- The amount was already paid off in full;
- The debtor is seeking an alternative collection method (e.g., installment agreement);
- The debtor is not able to pay their taxes because of a specific reason, such as having a terminal illness, not being employed, or only receiving income through welfare payments;
- An action was already filed to either discharge or withdraw the tax lien;
- The notice was not sent according to proper notice procedures, the notice was never received by the debtor, or the notice was sent to the wrong person;
- The debtor’s spouse is liable for the taxes; or
- The debtor has reasonable cause for not paying or filing their taxes on time.
Can Another Agency Besides the IRS Place a Tax Lien?
The IRS is not the only type of government agency permitted to impose a tax lien on a debtor’s property. Each state and county may also assign local government agencies to impose tax liens on debtors who fail to pay their state and local taxes.
Some other types of tax liens include liens for child support and/or alimony, property tax liens, judgment liens, mechanic liens, and mortgage liens.
Should I Hire a Tax Attorney if I have a Tax Lien Problem?
Tax lien issues typically require extensive knowledge of two complex areas of law, namely, real estate and tax law. They also usually involve a number of complicated legal concepts, which can make them difficult to resolve without the assistance of a lawyer. Thus, if you are experiencing problems with a tax lien, then it may be in your best interest to consult a local tax lawyer for further legal advice.
Some benefits of working with a lawyer who has experience in resolving issues concerning tax lien properties include negotiating with the IRS on your behalf for a fair compromise, ensuring that you comply with specific tax lien requirements, and determining whether the amount of debt you owe can be eliminated or reduced.
Additionally, your lawyer can also make sure that the property being seized is not exempt under state laws. They can also help you with the necessary procedures for appealing a government agency’s decision.