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The following is for informational purposes only

Tax Liens

Liens exist to create accountability and consequences to parties that owe debt. Liens help to leverage existing assets in cases when funds are owed. A lien can be filed against property, such as a house or office building, or other collateral that is used against a loan. Floating liens refer to liens against unfixed property, such as inventory.

Liens protect lenders, and provide an additional path to collecting debt. A property that has a lien attached to it can be sold to pay off the debt.

Overview

Tax liens can happen if an IRS tax bill is ignored or disputed. When the tax payment owed is not successfully collected, the IRS can initiate a Federal tax lien on the debtor’s property, such as their house or vehicle. This becomes the Federal government’s legal claim against the debtor’s property. It is important to note that this type of lien does not force the debtor to sell their property in order to pay the tax bill. It does, however, force the debtor to pay back the IRS first when he or she decides to sell the property.

Tax liens can be applied to real estate, vehicles, financial assets, businesses and other personal property. Tax liens can even attach to assets that are purchased after the IRS files the lien.

How do Tax Liens Work?

Tax liens usually follow this framework:

  • The IRS sends a bill to a debtor.
  • The debtor fails to pay it.
  • The IRS sends Letter 3172 - Notice of Federal Tax Lien Filing and Your Rights to a Hearing Under IRS 6320 to the debtor.
  • The debtor has 30 days from the date of the letter to request an appeal. Letter 3172 includes instructions for requesting an appeal.
  • Debtors that miss the deadline for requesting an appeal, can file a request on Form 12153 for an Equivalent Hearing. It should be noted that this type of hearing doesn’t block a tax levy, suspend the 10 years the IRS has to try collecting the debt, or allow the debtor to go to court to appeal any decision by the IRS Office of Appeals.

Tax Liens vs. Tax Levies

Tax levies are often the next step in the back taxes collections process. Levies are more serious than liens, and usually executed only if the lien process has not been successful in the collection of the debt.

A tax levy is a separate action from the lien, and through a levy, the government actually seizes one’s property or assets to satisfy a tax debt that has gone unpaid. An example of this is when the IRS levies the debtor’s bank account, withdrawing the amount needed to satisfy the tax debt. Federal tax levies mean that the IRS has the right to seize the funds as payment for what a debtor owes prior to anyone else’s claim.

Tax liens are common, and usually effective for the purposes of collecting tax debt. As the old adage goes: nothing is certain but death and taxes. If taxes are owed to the IRS, it is very likely that a tax lien will affect one’s assets until that debt is paid, or worse, a levy will seize the debtor’s property to settle the tax debt. It is important to stay ahead of your tax liabilities and to be familiar with IRS collections practices.

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