Have you ever wondered what the consequences of neglecting your tax debt are? You probably must have heard the terms tax lien and tax levy as well as used them interchangeably without having a clear understanding of either of these expressions. The U.S. government files a notice of levy after filing a notice of tax lien if you don’t pay your income taxes on time.
What is a lien?
A federal tax lien gives the Internal Revenue Service (IRS) a legal claim to your property or part of your property as a result of your refusal or neglect regarding payment of income taxes. ‘Notice of Federal Tax Lien’ is a document issued publicly by the IRS announcing that the government has a legal right over your property. It also establishes a higher claim of the government over your property as compared to other creditors. The lien may be attached to your real estate property, personal property (including your home) or your financial assets. Once they file the lien, it becomes binding on assets you own at the time of filing and future assets you own, until the tax liability is paid or satisfied.
A tax lien may harm your creditworthiness since the Notice of Federal Tax Lien is issued publicly. As of the beginning of 2018, three credit bureaus (Equifax, Transunion, and Experian) mutually agreed to remove all the tax liens from all credit reports. Before then, tax liens used to impact credit scores negatively. Today, unless the creditor searches thoroughly and discovers your notice of tax lien in public records, the unpaid tax bill won’t have any impact on your credit report luckily.
How to avoid tax lien?
The most reliable method of avoiding tax lien is to pay your income taxes along with your tax return by the due date. It is understandable if you’re financially incapable of paying off the debt at once, which is why the IRS has convenient options as follows:
- Installment agreement plan: You can apply for an installment agreement if you’re having liquidity problems in the present. The interest and penalty charges are going to accrue, but you can pay your tax debt over a period of time to avoid a tax lien.
- Offer in compromise: This option allows you to negotiate an amount with the IRS that you agree to pay and the IRS agrees to accept. You can settle your tax debt at a lower amount than what you originally owe if you meet the required criteria.
- Credit card: Although credit card interest rates are very high, you can pay your taxes through credit cards if a tax lien seems imminent.
- Personal unsecured loan: You can obtain a personal unsecured loan to pay your
- if you can secure one with a lower interest rate. Consider comparing the interest rate charged to the accumulated penalties and interest charged on the tax debt.
How to remove tax lien?
If the tax lien has already been filed against you, there are a few ways to remove or release the tax lien explained below.
Pay your taxes in full: Yet again, if a notice of tax lien is already out there, the best way of releasing it is by paying your tax debt. You can opt for any of the options mentioned above, i.e., offer in compromise, installment agreement plan, and credit.
Subordination: Subordination gives other creditors the opportunity to move ahead of the IRS, in terms of the order of priority, in case of bankruptcy. In essence, preference is given to another creditor to be paid before the IRS. This method allows you to pay back the tax debt using the money obtained from the subordinated loan.
Discharge: If a tax lien is attached to enough value of property to satisfy the tax debt, you may ask the IRS to discharge the lien subject to the sale of the property. The sale proceeds will then be used to pay off the tax debt. The discharge also ensures a new owner obtains such property free of lien.
Withdrawal: This method removes the public Notice of Federal Tax Lien in cases where the lien was filed incorrectly, removal will facilitate collection by IRS, tax liability was satisfied, or when the removal is in the best interest of the taxpayer and IRS.
Release: The release of a tax lien removes the Notice of Federal tax Lien and puts an end to the statutory claim.
Tax Levy versus Tax Lien
A tax levy the legal seizure of your property by the IRS as compared to a tax lien that gives a legitimate claim of your assets to the IRS. A tax levy is a means of confiscating money from the delinquent taxpayer by levying bank accounts, garnishing salaries, and sale of a property. A tax lien, on the other hand, is a means of the IRS securing the tax liability by using your property as collateral for the debt owed. With a lien, the IRS has a claim to any sales proceeds received from the sale of the property.
When the taxpayer fails to clear tax debt even after Notice of Federal Tax Lien, IRS issues a Notice of Intent to Levy, and a Notice of Right to a Hearing. The levy is started 30 days after receiving the notice of levy.
Bullet points # 3
- A Notice of federal tax lien is a public document that allows the IRS to have a legal claim over your property or part of your property
- IRS has a higher claim over the property instead of other creditors
- It can be attached to your personal property, real estate property or financial assets
- Notice of federal tax lien is published after your persistent neglect of your tax payable and the notice for demand and payment
- Can be avoided by paying your taxes on time through credit card, unsecured loans or applying for installment agreement plan or offer in compromise.
- Tax lien can be released through:
- paying your taxes
- subordination, making it easier for you to obtain loans
- Discharge or sell a part of property that has lien attached to it, to pay taxes
- Withdrawal where the IRS removes Notice of federal tax lien from public records for the creditors to move ahead.
- Tax levy is confiscation of your property, salary, bank account or even the federal payments you receive from BFS whereas tax lien gives a legal right of your property to the IRS. Tax levy is forced collection of tax whereas tax lien gives you time and options to pay your taxes.