Taxes help cover vital infrastructure like roads, schools, and emergency services. Every year, citizens are required to file federal and state taxes by the deadline of April 15 (note, however, that the 2019 deadline was moved back to July 15, 2020, because of the coronavirus pandemic).
There are penalties for not filing your taxes on time. The worst situation you can put yourself in is refusing to file taxes, even if you are afraid and wondering how you will pay back taxes. Consequently, step one is to make sure you file taxes on time.
Step two is to ensure that your tax returns are filed correctly with the proper calculations. Taxpayers may take advantage of applicable deductions and other tax breaks to reduce liability. Regardless, you may end up owing the federal government money once the calculations are complete.
Earners in the United States traditionally fall into one of two categories. Regular earners have Social Security and Medicare automatically withdrawn from each paycheck. Meanwhile, independent contractors and small businesses need to report all their earnings at the end of the year or in estimated quarterly payments.
If you fall into the latter category, you will likely owe the government money. Taxes that you have yet to pay back represent debt you owe to the IRS. It is your responsibility to pay back taxes, though there are programs and financial relief options for individuals and families struggling to resolve tax debt.
It is crucial to seek tax solutions as opposed to trying to forget or ignore back taxes. The debt does not go away, and the IRS will not forget how much you owe to the government. If you continue to ignore their warnings, the federal or state government can enforce a tax lien in your name. If you’re facing a tax lien, the tax professionals of Levy & Associates can help—reach out to us today. In the meantime, take a look at the following helpful information.
How Do Liens Work?
A lien is a claim that the government or an organization places on the property that you use or possess. For example, a lien may be placed on your car as part of the payment agreement while you pay off the loan. The lender, known as the lienholder, has a claim over the property before anyone else.
Tax liens are particularly cumbersome because the government can have first rights to your business, home, or car before any other lender. The federal and state government may enforce a lien to resolve tax debt.
Therefore, if you owe money to the IRS and refuse or are unable to pay off the debt, you can have a lien placed on your assets. “Lien” is a Latin word meaning “to bind,” and it essentially means the legal action binds a debtor to the lender for a property until the debt gets paid in full.
Tax liens hold the property, which makes it challenging to sell the assets until the debt is resolved. For example, in most states, a sale cannot be completed until the lien is discharged (or the tax debt gets settled).
Liens can be placed on physical property like land or buildings, as well as personal property like a car or equipment. Tax liens are also the first step toward freezing a bank account or garnishing wages, which happens after the lien transforms into a tax levy.
Liens are public notices that inform other lenders and buyers that an entity has ownership over the property. Therefore, a tax lien enables the government to hold ownership over real estate or personal property until your debt with the government is paid in full.
Tax liens are damaging to your credit score and can also inhibit you from taking out a new loan, since lenders are naturally more hesitant to provide funds to individuals with a lien placed in their name.
Consequently, liens make it exceedingly difficult for small business owners to continue to be successful. They also shackle individuals to their homes and cars until the debt is handled appropriately. If you continue to ignore warnings from the IRS, the next step is to transition the tax lien into a levy. Once the levy is activated, you could lose that property and assets.
Tax liens get complicated because each state has different rules that govern the process. Contract terms and state laws dictate what a lienholder or lender may or may not do if they wish to repossess or foreclose on a property. These actions inevitably affect credit rating and prove costly in the long run.
What Are the Types of Liens?
There are several types of liens. Before we dive into them, let’s take a look at the two categories into which they fall.
Consensual liens are something you agree or consent to when you make a purchase. For example, when you buy a new car, it is unlikely that you will pay for it in full with cash. Instead, you will enter some type of loan agreement, which includes all the repercussions if you fall behind on payments.
While lenders are happy to provide a loan, there are often many stipulations, with one of them being a consensual lien. Most car loans include the ability of the lender to place a lien on the loan and use the vehicle as collateral.
Meanwhile, statutory liens (or non-consensual liens) are obtained through a court order. They put a claim on an asset for unpaid bills. Tax liens are just one example of a statutory lien.
Here are some types of non-consensual liens:
- Tax Lien: Local, state, or federal governments may put a tax lien on your property. This is the result of failing to pay back taxes you owe to the government. The lien gives the government a security interest in the property, which needs to be paid off before you can sell the asset. It also hampers your credit score and makes qualifying for a new loan even more difficult.
- Mechanic’s Lien: This is another type of lien that is usually presented by a contractor or subcontractor. For example, a contractor does work on a home, and the homeowner refuses to pay for the service. The contractor needs to go to court to get a judgment against the homeowner for the outstanding balance. A mechanic’s lien is placed on a home for collateral.
- Attorney’s Lien: Attorneys may also seek to place a lien to hold a client’s property during legal representation. This is comparable to a mechanic’s lien in that it holds some type of property while the client receives legal services. An attorney’s lien is a common practice used during personal injury cases before an award is handed out to the plaintiff.
- Judgement Lien: The judgment lien is another type of lien related to the courts. The court awards it after a lawsuit. Plaintiffs that win a lawsuit may sometimes only receive their award through this type of lien. It is common in small claims court cases.
Regardless of the type of lien, any kind that is placed on assets needs to get paid off before the individual can sell the asset. You cannot receive payment and hand over a title until the lien is cleared with the lender.
Consequently, tax liens put a stranglehold on property owners and business owners who need to address the tax debt before they can move on with life. Liens can progress to a levy, which inevitably gives the IRS the right to go after your wages and bank accounts and even seize property.
Is a Lien a Debt?
A lien is technically a claim or legal right against assets that are typically used as collateral to satisfy a debt. Therefore, a lien is technically not a debt, but a legal way for a lender to approach and hold your assets because of unpaid debt.
The lien serves to guarantee an underlying obligation like the repayment of a loan or tax debt. If the burden is not satisfied, the creditor or government can legally seize the asset to recoup the losses of the debt.
Liens are complicated because they are governed by each state, which makes it essential to become aware of local guidelines. Speaking with a tax professional at Levy & Associates is an excellent next step for those dealing with tax debt and the notice of a lien, as the process can be convoluted.
Liens also factor in bankruptcy proceedings because they involve secured loans and repayment of debt. While some liens get discharged in bankruptcy, it is vital to remember that other liens do not go away, even with bankruptcy. Tax liens are one of those types of liens that are generally not forgiven based on the most common types of bankruptcy.
The only legitimate way to get rid of a tax lien is to pay the amount you owe the government in full or pursue another option to satisfy the debt in stages. Paying the debt in full is the quickest and best way to remove a lien on your property.
Once the debt is satisfied, the lender will provide a “release of lien” written statement. The official statement notifies potential buyers or future lenders that the assets are no longer held under another entity.
What Happens When a Lien Is Placed on Your Home?
The IRS is required by law to notify you of unpaid taxes. You have time to pay the debt in full or pursue a type of payment plan or Offer in Compromise to settle the outstanding balance. If you continue to avoid making payments or ignore the IRS altogether, the agency will likely pursue a tax lien.
When a lien is placed on your home, it gives the government a legal right and claim over the property. Liens are damaging to homeowners because they indicate that there is debt owed and make qualifying for a new loan or selling the property difficult, if not impossible.
Homeowners that continue to ignore a tax lien or refuse to pay it off may eventually lose the property through a tax levy. Before things get to this stage, you should consult a tax professional to work towards getting the lien removed.
Those that own property can get a lien removed by making payment arrangements or paying off debts in full. Until then, the lien will continue to be a problem and could eventually become a levy that allows the IRS to seize your assets.
The Dangers of a Tax Lien
Federal Tax Liens give the IRS a legal claim to your property as security or payment for your tax debt. A Notice of Federal Tax Lien may be filed only after the IRS assesses the liability.
You will be sent a Notice and Demand for Payment—a letter that tells you how much you owe in taxes, and that you need to fully pay the debt within 10 days after the IRS notifies you about the lien. If you fail to make payment, a lien is created for the amount of your tax debt.
By filing a notice of this lien, your creditors are publicly notified that the IRS has a claim against all your property, including property you acquire after the lien is filed. This notice is used by courts to establish priority in certain situations, such as bankruptcy proceedings or sales of real estate.
The lien attaches to all your property (such as your house or car) and to all your rights to property (such as your accounts receivable if you are a business).
Levy & Associates—Strong Defense Against Tax Liens
Once a lien is filed, your credit rating may be harmed. You may not be able to get a loan to buy a house or a car, get a new credit card, or sign a lease. To overcome these challenges, you must work to resolve your tax liability as quickly as possible before lien filing becomes necessary.
It is critical to contact Levy & Associates before the lien is attached to your property. You do have appeal rights when a lien is filed, but these must be exercised within 30 days of the notice filing date. If the lien has already been attached to your property, we can contact the IRS and begin the process of releasing the lien. Time is of the essence, so be sure to reach out as soon as possible.