Unpaid Tax Debt leads to Federal Tax Lien

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It is important for taxpayers to understand that the IRS can put a lien on property and/or assets in cases of continued tax debt non-payment. A tax lien is the IRS' legal claim on a taxpayer’s property and/or assets if the taxpayer ignores or refuses to pay tax debt after repeated reminders. A taxpayer cannot sell any asset with a lien placed on it.

The IRS can place a lien on personal property, such as a car, boat, jewellery, and financial assets, such as stocks, bonds, bank deposits, and real estate. A tax lien secures the payment of the tax debt. In case of continued non-compliance, the IRS moves to levy the property and/or assets on which the lien is in place.

Tax Lien Affects Credit Ratings

The placement of a tax lien adversely affects a taxpayer's credit score, making it difficult to obtain credit. After the placement of a lien, the IRS files a public document, the Notice of Federal Tax Lien to inform creditors that the IRS has the legal right over the property and/or assets of a taxpayer.

According to the Fair Credit Reporting Act, an unresolved tax lien can stay on a credit report for an indefinite period. Taxpayers who pay their tax debt amount in full will be able to have the lien removed from their credit. This new relaxation is only open for those who pay their tax debt in full. Federal tax liens are public records and can be accessed by anyone.

When the IRS removes lien records after the full payment of tax debt, credit reporting agencies also remove the lien from their records. Norm Magnuson, Vice President of Public Affairs for the Consumer Data Industry Association (CDIA) said, “I’ve confirmed that all three credit reporting agencies remove withdrawn IRS tax liens.”

Taxpayers may use IRS Form 12277, Application for Withdrawal to request the withdrawal of a tax lien after the lien has been released.

IRS Notices before Placement of Tax Lien

Taxpayers begin to receive notices from the IRS regarding unpaid taxes as the initial collection attempts start. It is beneficial for taxpayers to begin making efforts to resolve their tax debt to avoid a tax lien.

Some of the notices taxpayers may expect to receive are:

  • CP14 Notice: Information on the tax debt amount and suggestions on methods to pay.
  • CP90C Notice: The IRS has levied for unpaid taxes. The taxpayer has the right to a Collection Due Process hearing.
  • CP297C Notice: The IRS has levied for unpaid taxes. The taxpayer has the right to a Collection Due Process hearing.

If a tax lien has been placed and no efforts are made by the taxpayer to pay the tax debt, the IRS will send a final notice, Notice of Intent to Levy and Notice of Your Right to a Hearing.

The new Fresh Start initiative by the IRS has increased the IRS Notice of Federal Tax Lien threshold from $5,000 to $10,000. Taxpayers may still receive notices from the IRS on amounts less than $10,000 in certain special cases.

From the author: Tax Resolution Legal Team
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