May 12, 2023


This article provides a comprehensive guide to understanding tax liens, their purpose, and the different types at the federal, state, and local levels. You will learn how tax liens are created and filed, the process and requirements for IRS tax liens, as well as how to release and prevent them.

Additionally, the article discusses the impact of tax liens on property owners, including effects on credit, borrowing, and property transfers. It also delves into resolving tax liens through various approaches, such as paying off debts, installment agreements, and appealing a lien.

Finally, the article explores the world of tax lien investing, offering insights into risks, returns, and auction strategies.

Understanding Tax Liens

Definition and Overview

A tax lien is a legal claim that the government places on your property due to your failure to pay your taxes. Simply put, it is a method for the government to secure the payment of outstanding tax liabilities.

When a tax lien is placed on your property, it can have various negative consequences, including damaging your credit score and hindering your ability to sell or refinance the property.

It’s important to understand that tax liens are not the same as tax levies. A tax lien is a claim to secure the government’s interest in your property, whereas a tax levy is an actual seizure of your property to pay your outstanding tax debt.

The Purpose of Tax Liens

The primary purpose of a tax lien is to protect the government’s financial interest in collecting unpaid taxes. When taxpayers fail to pay their taxes, the government may file a tax lien to secure any outstanding tax liabilities. This ensures that the government will be paid before other creditors when the property is sold or refinanced.

Tax liens protect the government’s financial interests by giving them priority over other creditors. This means that if the taxpayer decides to sell the property, the proceeds from the sale will first be used to pay off the tax lien before any other debts. Similarly, if the property owner files for bankruptcy, the tax lien takes priority over other unsecured debts.

Types of Tax Liens: Federal, State, and Local

There are three main types of tax liens: federal, state, and local.

  1. Federal Tax Liens: These are filed by the Internal Revenue Service (IRS) for unpaid federal taxes. Federal tax liens can be filed for various unpaid taxes, including income tax, payroll tax, and estate tax.

  2. State Tax Liens: These are filed by state taxing authorities for unpaid state taxes. These liens can be filed for unpaid state income taxes, sales taxes, and various other state-level taxes.

  3. Local Tax Liens: Local tax liens are filed by local governments for unpaid local taxes. This can include property taxes, school taxes, and other municipal taxes.

It’s important to note that each tax lien has different priority levels. In most cases, federal tax liens have priority over state and local tax liens. However, specific priority rules may vary depending on the jurisdiction.

How Tax Liens are Created and Filed

Tax liens are created when a taxpayer fails to pay their taxes by the deadline, and the government determines that they have no intention of doing so voluntarily.

To establish a tax lien, the taxing authority will file a Notice of Federal Tax Lien, Notice of State Tax Lien, or a similar document with the local county recorder’s office, depending on the type of tax lien.

The notice serves as a public record, informing other creditors and potential buyers of the government’s claim against the property. Once the lien is filed, a taxpayer’s credit score will be negatively impacted, making it more difficult for them to borrow money, obtain new credit, or sell or refinance the property.

Consequences and Resolving a Tax Lien

The consequences of a tax lien can be severe and long-lasting. A tax lien can damage your credit score, limit your ability to sell or refinance your property, and affect your financial future. Furthermore, tax liens can accrue interest and penalties, increasing your tax debt over time.

Resolving a tax lien involves either paying your tax liability in full or working out a payment plan with the taxing authority. This may include an installment agreement, offer in compromise, or other tax relief options. Once you’ve paid off your tax debt, the lien will be removed from public records, and your credit score should improve.

It’s essential to take action as soon as possible if you’re facing a tax lien. Consult with a tax professional or attorney to discuss your unique situation and identify the best course of action to resolve your tax lien and safeguard your financial future.

Federal Tax Liens: The IRS and Unpaid Taxes

Requirements for an IRS Tax Lien

A federal tax lien is the government’s legal claim against your property when you fail to pay a tax debt. The Internal Revenue Service (IRS) imposes a lien to secure the government’s interest in your assets, ensuring it can collect the owed taxes. For the IRS to file a federal tax lien, the following requirements must be met:

– The IRS assesses a tax liability by sending you a Notice and Demand for Payment.
– You refuse or neglect to pay the assessed tax debt in full within ten days after receiving the notice.
– The IRS files a Notice of Federal Tax Lien, providing public notice and alerting creditors of the government’s claim on your property.

Federal Tax Lien Process

The process for a federal tax lien begins with the assessment of your unpaid taxes. The IRS will send you a bill outlining your tax liability and the total amount due. If you fail to pay the tax debt in full within ten days of receiving the notice, the IRS has the right to start the federal tax lien process.

The next step in the process is filing a Notice of Federal Tax Lien. This public document is filed with county or state offices, notifying creditors that the government has a legal claim on your property. The lien attaches to all your current and future property and assets, including real estate, personal property, and financial assets.

While the IRS can file a lien, it does not mean the agency will immediately seize your property. You still have options for resolving the tax debt and possibly avoiding the lien’s negative consequences.

Federal Tax Lien Release and Withdrawal

A lien can be released or withdrawn under certain circumstances. The release of a lien signifies that the lien has been satisfied, and the IRS no longer has a legal claim on your property.

To have a federal tax lien released, you must meet one of the following conditions:

1. Pay the tax debt in full, after which the IRS will release the lien within 30 days.
2. Enter into a lien subordination agreement with the IRS, which allows you to take out another loan that could help you pay off the tax debt.
3. Establish an Installment Agreement to pay your tax debt over time. This may result in the removal of the lien, but not always.

A lien withdrawal occurs when the IRS removes the public Notice of Federal Tax Lien but still retains the right to collect the debt. A withdrawal can occur if:

1. The tax debt was paid in full, but you request the withdrawal to expedite the lien release process.
2. The IRS made an error when filing the lien.
3. You enter into a Direct Debit Installment Agreement, which requires automatic monthly payments from your bank account.

Preventing a Federal Tax Lien

The best way to avoid a federal tax lien is to prevent it in the first place. Here are a few strategies:

1. File your tax returns on time and pay any taxes owed in full.
2. If you are unable to pay the tax debt in full, seek professional help as soon as possible. An attorney or tax professional can help you explore options for payment plans, penalty abatements, or compromise agreements.
3. Stay in communication with the IRS to show that you are making efforts to resolve your tax debt.

State and Local Tax Liens

Variances Among States and Counties

State and local tax liens are similar to federal tax liens, but they are governed by the laws of the specific state or local jurisdiction where the tax debt originates.

This means that the lien process, priority of claims, and release procedures can vary significantly from one state or county to another.

Common State and Local Tax Liens

There are several types of state and local tax liens, including liens for unpaid property, income, or sales taxes. These liens allow the government to secure the tax debt and may attach to both personal and real property within the jurisdiction.

State-specific Lien Release Procedures

Since state and local tax lien laws and procedures vary, the release procedures can differ as well.

Generally, the tax debt must be paid in full or an agreement made with the taxing authority to pay the debt over time. Once the debt is settled, the government should provide you with a release of lien document, which then needs to be filed with the appropriate office, usually the county recorder or clerk’s office, to remove the lien from public records.

Impact of Tax Liens on Property Owners

Effects on Credit and Borrowing

Tax liens have a significant impact on your credit and borrowing capabilities. They can lower your credit score, making it harder to secure loans or receive favorable terms on financing.

Lenders may view a tax lien as a red flag, indicating financial irresponsibility, and potential lenders may be less likely to extend credit to you.

Tax Liens and Property Transfers

Tax liens can also prevent or complicate property transfers. In a sale, the lien must usually be satisfied before the property’s title can be cleared and transferred to a new owner.

A tax lien could stall or prevent the sale of the property altogether if the proceeds are insufficient to cover the tax debt, or if the buyer is unwilling to take the property subject to the lien.

Legal Rights of Property Owners

Property owners facing a tax lien still have legal rights and options for recourse. They can challenge the validity of the lien, by disputing the amount or proving that the tax was paid.

Additionally, property owners can negotiate payment plans, settlements, or abatements with the taxing authority. It’s critical for property owners to consult with legal or tax professionals to explore their options and protect their rights throughout the tax lien process.

Resolving Tax Liens

A tax lien is a legal claim placed by the government on a taxpayer’s assets and property for unpaid tax liabilities. Tax liens can have a devastating effect on a taxpayer, as they may lose the right to sell or refinance their property, have their credit score negatively impacted, or face seizure of their assets.

Resolving tax liens can be a complicated and time-consuming process; however, it is crucial to address them sooner rather than later.

Let’s discuss different measures a taxpayer can take to resolve tax liens, such as paying off outstanding debts, negotiating an offer in compromise, setting up installment agreements, appealing a tax lien, and considering bankruptcy as a last resort.

Paying Off Outstanding Debts

The most straightforward approach to resolve a tax lien is to pay off the outstanding tax debts. Once the individual pays the tax liabilities in full, the Internal Revenue Service (IRS) or state tax authority will remove the lien after 30 days.

It is essential first to determine the exact money owed by requesting a tax lien notice or a tax lien search through the local county recorder’s office. Contact the appropriate tax authority to verify the amount owed and make arrangements for full payment. Keep in mind that interest and penalties may continue to accrue on the tax debt until it is paid in full.

Offer in Compromise

An offer in compromise (OIC) is a negotiation between a taxpayer and the IRS to settle a tax liability for less than the full amount owed. This option is typically available when there is doubt as to the taxpayer’s ability to pay the debt in full or liability.

To apply for an OIC, individuals must submit the appropriate application form (Form 656) along with a non-refundable application fee and initial payment. The IRS will evaluate the taxpayer’s financial information, including income, expenses, assets, and the taxpayer’s ability to pay.

If the IRS accepts the offer, the taxpayer must fulfill their end of the agreement, which may include making a lump-sum payment or monthly payments over time.

Installment Agreements

An installment agreement is another option for resolving tax liens. This arrangement allows taxpayers to pay off their tax debt in smaller, more manageable monthly payments over time.

To qualify for an installment agreement, the taxpayer must owe $50,000 or less and have filed all required tax returns. The IRS will determine the monthly payment amount and the duration of the installment agreement based on the taxpayer’s financial situation.

It is essential to make timely payments and maintain compliance with tax filing requirements during the agreement.

Appealing a Tax Lien

Taxpayers have the right to appeal a tax lien if they believe it was filed incorrectly or if they have already satisfied the tax liability. Individuals can request a Collection Due Process (CDP) hearing or a Collection Appeals Program (CAP) review.

A CDP hearing provides an opportunity to discuss alternative payment arrangements or resolve issues related to the lien directly with the IRS.

A CAP review allows taxpayers to appeal IRS actions such as lien, levy, or seizure. It is crucial to seek legal or professional tax assistance when appealing a tax lien.

Bankruptcy and Tax Liens

Bankruptcy is a legal process that allows individuals or businesses to eliminate or repay some or all of their debts under the protection of the federal bankruptcy court. Although bankruptcy can help discharge certain tax debts under specific conditions, it may not be the best solution for resolving tax liens.

Bankruptcy will not remove a tax lien from an individual’s property, and the lien will remain in effect until it is paid or the expiration of the statute of limitations. It is essential to consult with an experienced bankruptcy attorney or tax professional to discuss the potential impact of bankruptcy on tax lien resolution.

Tax Lien Investing

Tax lien investing is an alternative investment strategy that offers potentially high returns for investors who are willing to take on specific risks. This investment involves purchasing the right to collect unpaid property taxes on behalf of a local government.

Let us explore the basics of tax lien certificates and investing, understanding risks and returns, navigating state-specific rules and regulations, auction process and strategies, and tax lien redemption and foreclosure.

Tax Lien Certificates and Investing Basics

A tax lien is a claim placed on a property by the government due to the owner’s failure to pay its property taxes. When a property owner fails to pay these taxes, the local government may offer the tax lien for sale in the form of a tax lien certificate.

Tax lien certificates represent the investor’s right to collect the unpaid taxes, plus interest and penalties, from the property owner.

Investing in tax lien certificates allows investors to potentially earn high returns as the property owner is required to pay off the lien, including interest and penalties, to avoid foreclosure. Tax lien certificates typically have interest rates that range from 8% to 36%, depending on the state where they are issued.

As an investor, you can purchase tax lien certificates by participating in public auctions held by the local government. If the property owner does not pay off the lien within a specified period (known as the redemption period), you have the right to foreclose on the property and potentially acquire it at a fraction of its market value.

Understanding Risks and Returns

There are several risks associated with tax lien investing. One of the primary risks is that the property owner may not pay off the tax lien during the redemption period, leading to the need for foreclosure proceedings. Foreclosure can be a lengthy and costly process, and there is no guarantee that the investor will be able to recover their investment.

Another significant risk is the quality of the property securing the tax lien. Some properties may be worth less than the value of the tax lien, leaving the investor with a loss if they are unable to sell the property after foreclosure.

Despite these risks, tax lien investing can still offer attractive returns for investors. The potentially high interest rates and penalties associated with tax lien certificates can provide a significant return on investment (ROI) if the property owner pays off the lien.

Also, if the investor is successful in acquiring the property through foreclosure, they may benefit from the potential increase in property value as a long-term investment.

Navigating State-specific Rules and Regulations

Each state has specific rules and regulations governing tax lien investing. These regulations may dictate aspects such as the interest rates, redemption periods, and auction processes. Some states may also require that investors register with the local government and obtain a tax lien investor license or permit.

It is crucial for investors to research and familiarize themselves with the applicable state and local regulations before investing in tax liens. This due diligence helps to understand the potential returns, risks, and processes involved in tax lien investing, particularly concerning foreclosure and redemption rights.

Auction Process and Strategies

Tax lien certificates are typically sold at public auctions, with the highest bidder securing the right to collect the delinquent taxes. The bidding process may be either a premium or interest rate auction.

In a premium auction, investors bid on the amount they are willing to pay for the tax lien over and above the outstanding taxes, while in an interest rate auction, they bid on the interest rate they are willing to accept, with the lowest interest rate winning the bid.

Investors need to prepare for the auction by researching the properties up for auction, understanding their potential value, and setting maximum bidding amounts.

Also, it is essential to have a clear bidding strategy and stick to it, avoiding getting caught up in auction frenzy and overbidding on tax lien certificates.

Tax Lien Redemption and Foreclosure

The redemption period is the time frame within which the property owner can pay off the tax lien, including interest and penalties, to avoid foreclosure. This period varies by state and can range from a few months to several years.

If the property owner does not redeem the tax lien during the redemption period, the investor has the right to initiate foreclosure proceedings to recover their investment. Foreclosure requires following specific legal procedures and may involve additional costs and time.

However, if successful, the investor may be able to acquire the property at a significantly discounted price, either through a public auction or a direct transfer of the property title.

Tax lien investing can be a potentially lucrative investment strategy if approached with diligence and a thorough understanding of the risks and processes involved.

By familiarizing oneself with state-specific rules, researching properties, and having a disciplined bidding strategy, investors can capitalize on the benefits of tax lien certificates while mitigating the associated risks.

Tax Liens FAQs

1. What is a tax lien and how is it imposed?

A tax lien is a legal claim made by a government body on an individual’s or business’s property due to their unpaid taxes. This claim is usually imposed after a tax assessment, multiple notifications, and failure to repay the owed taxes within a specified period.

2. Can you remove a tax lien from your property or credit report?

Yes, a tax lien can be removed from your property by paying the owed taxes, penalties, and interest in full. For it to be removed from your credit report, a lien release or withdrawal must be filed, and credit bureaus need to be updated about the lien resolution.

3. What types of property can be affected by a tax lien?

A tax lien can affect various types of property, including real estate, personal property, and financial assets. The government may impose liens on buildings, lands, vehicles, bank accounts, or any other valuable possessions until the tax debt is settled.

4. How does a tax lien sale or auction work?

A tax lien sale or auction occurs when the government sells its lien to an investor or third party. The purchaser usually pays the unpaid taxes, thus becoming a lienholder. If the property owner does not repay the lien with interest, the lienholder may eventually gain ownership of the property.

5. Are there consequences of a tax lien beyond losing property?

Beyond the threat of losing property, tax liens can negatively affect credit scores, making it challenging to obtain loans or new lines of credit. Additionally, liens may hinder employment opportunities or business dealings as they signify financial irresponsibility.

6. Can one negotiate or settle tax liens for less than the owed amount?

Yes, one can negotiate with the taxing authority under special circumstances, such as financial hardship, to reduce the owed tax amount. This process, called an Offer in Compromise, proposes a lower settlement amount to pay the tax debt and release the lien.

About the Author

As a native Washingtonian, Carlos Reyes’ journey in the real estate industry began more than 15 years ago when he started an online real estate company. Since then, he’s helped more than 700 individuals and families as a real estate broker achieve their real estate goals across Virginia, Maryland and Washington, DC.

Carlos now helps real estate agents grow their business by teaching business fundamentals, execution, and leadership.

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