How Do Tax Liens Work?

If you owe taxes and you haven’t paid them, the government can impose a tax lien on your assets. When this happens, the government stakes a claim in things of value that you own, including your home.

With a tax lien, the IRS doesn’t physically take your property, though they can do so with a levy if your tax debt remains unpaid.

On the flip side, tax liens can also present a lucrative investment opportunity. Tax lien investing can potentially yield double-digit returns, and it can also have a low buy-in threshold.

In this article, we’ll explain how tax liens work from both the perspective of a taxpayer and an investor.

What Are Tax Liens?

A tax lien occurs after the IRS sends a bill for taxes due and the taxpayer doesn’t pay for an extended period of time. At that point, the IRS can make a legal claim to your property, and the situation can escalate to a levy, which is, in effect, a seizure.

The types of assets that can be subject to a tax lien include real estate, vehicles, jewelry, savings and retirement accounts, and securities like stocks. The list even includes some government benefits and life insurance policies.

Though that lengthy list may seem aggressive, the good news is that some assets are off-limits. The IRS cannot impose a lien against clothing, school textbooks, and items like tools, personal belongings, and furniture that are valued below a certain threshold. Further, if your home is almost paid off and you owe less than $5,000, the IRS cannot attach a tax lien to it.

Consequences of Tax Liens

The IRS will notify you of any tax lien, and they tend to send several notices to give you time to resolve the situation. If you are sent notice of a tax lien, you can expect one or more of the following, depending on your situation and how and when you respond to the lien.

–   Tax levies: A tax levy is the IRS’s action of last resort when they’ve sent numerous notices, and a taxpayer has not responded or attempted to resolve the situation.

When the IRS issues a tax levy, it means that they can now legally seize your assets. This action can also include wage garnishments.

–   Loan challenges: Tax liens used to show up on your credit report, which dramatically lowered a credit score and made obtaining new credit extremely challenging.

Though that news is positive, it’s important to be aware that lenders and other financial institutions like credit card companies can still discover that you have a tax lien. As a result, it can still be tough to be approved for loans and other forms of credit.

–   Difficulty in selling or refinancing a home: Even though you can still technically sell property with a tax lien on it, the process becomes more complicated. The same is true for refinancing. And, according to the IRS, the tax lien must be satisfied before either of these can happen. One way to satisfy the lien is by applying any equity you have in the property.

Removing Tax Liens

Tax liens won’t magically disappear, no matter how hard you wish. However, there are several ways to have them removed.

–   Pay the IRS: The most straightforward solution is to simply pay your tax bill. This solution might not be practical, so it’s worth exploring some of the other times on this list.

–   Request a payment plan: If you can’t pay your bill in full, the IRS is often willing to allow financing so that you can make monthly payments until your debt is resolved.

–   Get an Offer in Compromise: Though not easy to get, an Offer in Compromise can dramatically lower your tax bill. In this scenario, the IRS agrees to accept less than you owe if you pay the negotiated amount in full.

–   Appeal the tax lien: Everyone makes mistakes, including the IRS. Whether a mistake was made, or you disagree with the IRS’s application of a tax lien, you can ask for a review to discuss your case.

–   Declare bankruptcy: Filing for bankruptcy is an extreme measure, and it’s not always a surefire way to discharge a tax lien. Still, it’s an option worth weighing in some circumstances.

Investing in Tax Liens

If you’re a savvy investor, you can diversify your portfolio by buying tax liens from the government and then collecting the balance due, plus interest, from the property owner.

Real estate investors often flock toward tax liens because they can potentially pick up a home for pennies on the dollar. However, this is just one type of tax lien, and there are several other types.

Before investing in tax liens, it’s highly recommended that you discuss your options with a financial advisor, especially if you’re not yet familiar with this instrument.

Contact Us for a Free Consultation

At Levy & Associates, we have a team of accountants, consultants, former IRS officers, and attorneys ready to assist you with issues related to tax liens. Contact us today for a free consultation and to discuss your next steps.

Contact Levy & Associates for Dependable Tax Audit Services

Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.

There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.

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