A tax lien is a type of claim by the Internal Revenue Service (IRS) against a debtor's property or funds for failure to pay income taxes. If a person does not pay their taxes, then the IRS may seek to recover the money owed in taxes by placing a lien on the person's home, car, bank accounts, wages, or other property. 

The IRS may then choose to sell the seized property at auction in order to recover the tax debts. However, a tax lien imposed on property does not automatically mean that the property will be seized and sold. Instead, the purpose is to ensure that the tax authority receives first claims before other creditors (like credit card companies) who may be looking to obtain the property in question. 

Thus, tax liens are usually reserved as a last resort, as a means to force the individual to pay their back taxes that are owed to the government. They can also be issued against businesses in connection with business property and unpaid business taxes.

Tax liens do however show up on a person’s credit report, which can have negative effects on their score. Having a lien on the property also prevents the property owner from selling or refinancing the property. The lien will remain attached to the property until the tax debt is paid off. 

How Should I Respond to the IRS’s Action?

If you receive a “Notice of Intent to Levy,” you should be sure to respond in the proper manner. First, you’ll want to respond within thirty days of receiving the notice. Your response should include:

  • A complete history of the incident;
  • A complete tax payment history of the debtor;
  • Why compliance with the tax code was not met;
  • Witness statements, documentation or any other evidence which could prove the circumstances you describe;
  • Your exact reason for failure to comply with the tax code.

Are There Any Forms of Tax Settlement Available?

The IRS has several methods of working with debtors to reach a solution for tax lien situations. Forms of tax settlements include:

  • Offer in Compromise: Although the IRS would like all the tax debt paid, it is possible to negotiate with them so that you only have to pay back a portion of what is owned. 
  • Innocent Spouse: A postnuptial agreement could limit the amount of taxes you legally owe the IRS because of your spouse’s own failure to properly follow the law.
  • Installment Payment Agreement: The IRS is usually happy to accept tax debt payments in monthly installments, provided that the debtor can abide by the agreement.
  • Unavoidable Absence: The IRS may grant time extensions for repayment if a circumstance beyond the debtor’s control, such as death or serious illness, prevents the debtor from meeting all obligations in a timely manner. Additionally, destruction of records by natural disaster or theft may be accepted if the event can be proved.
  • Undue Hardship: The IRS may grant time extensions if the debtor can prove that paying the taxes would place an extremely heavy burden or hardship on them. This approach cannot be used simply because the debtor doesn’t want to pay taxes; the debtor must honestly be suffering through economic hard times to qualify, and must be able to prove it. Bankruptcy, mentioned below, is probably one of the best ways to establish undue hardship in connection with an outstanding tax lien.
  • Active Military Service: The IRS will grant a time extension for persons serving in the military overseas.

How does Bankruptcy Affect a Tax Lien?

If a debtor successfully files for bankruptcy, the IRS will have to drop their tax lien against the debtor. This is because bankruptcy generally stops all collections efforts against the person who has filed for bankruptcy. 

However, once the debtor completes the bankruptcy process, the IRS may then be able to place a new lien on the debtor's property. You may need to contact an attorney if you are faced with a tax lien and are considering bankruptcy. Keep in mind that there are different types of bankruptcy, each one with their pros and cons:

Will the IRS Accept My Reason for Failure to Comply?

When submitting a reason for noncompliance, the IRS examines the debtor’s entire tax history and the reasons provided for not paying very carefully. If the IRS determines that something in the debtor’s information doesn’t add up (such as out-of-sync timelines or a debtor history filled with tax evasion), then the IRS may reject any justifications and offers of negotiations.

In general, the IRS expects that all citizens fulfill their tax requirements and holds each citizen to those standards. Thus, the following reasons for nonpayment are not accepted by the IRS: 

  • Constitutional Law Arguments: The IRS generally has the power to collect income taxes under the 16th amendment. Any protests regarding such powers should be directed to a judge or congressional representatives. This includes arguments about religious exemptions, due process issues, or slavery.
  • Mistake of Law: Claiming ignorance of the tax code will not help your case; generally speaking, ignorance of the law is never an excuse. The IRS demands that you hire an accountant or that you visit the local library if you don’t know how to do your taxes properly.
  • U.S. Citizenship: Citizenship is fairly easy to prove. Were you born on American soil or did you take an oath to be a U.S. citizen? If so, you’re a citizen and there obligated to pay income taxes to the American government.
  • Laziness/Forgetfulness: All citizens have a civic obligation to pay income taxes. Being lazy or forgetting about your financial responsibilities is not an acceptable excuse in the eyes of the government.

Can Another Agency Besides the IRS Place a Tax Lien?

Yes. Although the Internal Revenue Service is the organization most likely to impose a tax lien, the IRS isn’t the only agency capable of placing tax liens on debtors. For instance, state and county tax collection agencies may also invoke the same powers as their federal counterparts. Although the exact procedures may differ from state to state, you should follow the same guidelines when dealing with state and local agencies.

Should I Hire a Tax Attorney if I have a Tax Lien Problem?

Taxation problems contain many complicated legal issues and concepts. If you are faced with a tax lien or other type of tax issue, a tax lawyer in your area can help guide you through the process and make sure your rights are protected.