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A lien is method by which a lender can secure, restrict the use of, or encumber property if debts owed are not paid in a timely fashion. A tax lien is the government’s right to encumber property when taxes owed are not paid. This is slightly different than a tax levy, where the government seizes property and can sell it to pay back taxes. Tax liens are the right for a government to seize property and notification of this right, but the levy refers to actual seizing of property.
Though you may often hear of a tax lien in connection with unpaid taxes on property, organizations like the US Internal Revenue Service (IRS) can also use a lien as the beginning process in collecting unpaid income taxes, as can most state tax boards. Essentially the lien can exist against any “present or future property” including income you make. The existence of a lien against present or future property may result, if the taxes remain unpaid, in seizure of any and all assets to recover the tax. Most often though, a tax lien in connection with income tax results only in seizure of income via garnishment of future wages.
When people fail to pay needed taxes on property, they essentially grant the right for a state or federal government to seize that property, especially in the US. Under tax laws in different countries, a lien may only mean a government has the right to hold the property until taxes are paid, or most hold the property for a specific period of time before selling it, so that the person owing taxes has an opportunity to make money to pay those taxes. It’s important to note that if selling the property doesn’t result in full payment of the lien, the government can seize other property not associated with the item for which taxes are unpaid, or resort to things like seizure of assets and wage garnishment.
When you acquire property, it’s important to find out if the property has any liens against it. As a new owner, you may be held responsible for meeting these unpaid taxes. When people sell property with a lien on it, they may also sign release of the lien forms, which means the new owner will assume the responsibility of paying back taxes. Purchasing property can require the assistance of a good real estate agent or accountant so you can make sure you satisfy any tax liens existing against the property.
If a person owes money to several creditors or several state agencies, the law is not always clear on whether back taxes are the first things a person must pay. Organizations like the IRS do something called “perfecting” a tax lien, in order to establish priority over other creditors, though this doesn’t always work. Filing a Notice of Federal Tax Lien (NFTL) with local or state governments perfects the lien. The IRS has a strong interest in perfecting a lien first so they can be among the first paid through seizure or sale of property.
Tax liens do affect credit, and failure to pay them can result in serious downgrading of your credit score. When you can pay back taxes, liens are “released,” and cannot further affect your credit. Depending upon the amount of the lien, and your ability to pay it, it may help to consult a good tax attorney to help you create a reasonable offer of monthly payments that will allow you to retain possession of your property. In fact, you should address the issue of owing taxes you cannot pay early, before a tax lien is created or perfected, so that you can make payment arrangements with the agency issuing the lien, instead of waiting for lien and then levy to occur.