A tax lien may be defined as a legal claim made by a tax authority against the assets of an individual or corporate organization that fails to pay its tax liability to the government. A lien serves as a guarantee of the payment of a debt, especially with taxes. If the debt obligation is not met by the individual or corporate organization, then the tax authority is allowed to seize or take over the assets. A lien may be removed if the taxpayer reaches out to the IRS to find a payment plan to repay the debt or any other options available to them.
HOW DOES A TAX LIEN WORK?
If a taxpayer refuses to pay their taxes when due, the tax authority will send them a notice to inform them of their tax debts. If the taxpayer refuses to cooperate with the tax authority to make payments or negotiate a payment schedule or plan, then the tax authority may go ahead to place a tax lien on their property.
A tax lien informs other creditors of the tax authority’s interests in the taxpayer’s property and it serves as a public notice to other creditors who may be vying or have interests in the same properties.
PROCESSES INVOLVED IN A TAX LIEN.
The process of a federal tax lien begins when the IRS sends a notice and demand of payment to the taxpayer. This notice is sent as a letter and it contains details of the exact amount owed.
If the taxpayer refuses to pay or makes attempts to resolve the tax debts, then the IRS can go ahead to place a lien on the debtor’s properties or assets. The lien applies to all the taxpayer’s properties including vehicles, securities, and properties. If the taxpayer acquires new properties during the period in which the lien is effective, then the lien can also apply to such properties. Other business properties and accounts receivables are also covered by the lien.
Also, if the taxpayer files for bankruptcy, the lien may continue afterward. Federal tax debts are usually not wiped off by bankruptcy proceedings.
EFFECTS OF A TAX LIEN.
- Damages a taxpayer’s credit score: Once a notice of tax lien is sent to a taxpayer, it automatically appears on their credit report, ruining their credit score. This can hinder a taxpayer from getting a loan with good interest rates in the future.
- It prevents a taxpayer from refinancing such assets: Should the IRS place a tax lien on a taxpayer’s properties then it will be impossible for them to continue refinancing such assets.
- Assets acquired in the future may be included: Sometimes, assets that are acquired in the future by the taxpayer during the period of the lien may also be included under the lien.
- The lien affects your business assets: If you think your business’s assets are spared from a federal tax lien, then think again. The IRS can place a tax lien on your business’s buildings and other properties.
- Filing for bankruptcy cannot protect you: Filing for bankruptcy may wipe off most of your debts but certainly not a federal tax debt. Hence, federal tax liens may continue to apply on a taxpayer’s property even after filing for bankruptcy.
- Don’t ignore the notice: The IRS sends a notice to the taxpayer before placing a lien on their properties. This notice should not be ignored and should be resolved as soon as possible.
- Pay your tax bill: the simplest and fastest way to remove a tax lien is to pay what you owe to the IRS. If you can afford to pay all of it, do it immediately.
- Get an IRS payment plan: The next best solution is to work on an IRS payment plan. You can apply for this through the IRS platform and you’ll find a plan that will be convenient and feasible to settle your tax debt with.
- Ask for an Offer in compromise (OIC): An offer in compromise is given to taxpayers who are unable to offset the total amount of debt owed. The IRS only accepts a few applications each year for it and you must have filed your tax returns at the time.
WHAT IS A TAX LEVY?
A tax levy is an authorized action carried out by a tax authority to seize a taxpayer’s property to satisfy their tax debt without involving court action. Unlike tax liens, a tax levy gives the IRS a direct authority to seize your assets and sell them to satisfy your tax debt. Common types of tax levies are wage garnishment which occurs when the IRS reaches out directly to your employers to send your paycheck to them to offset your debt, bank levy which occurs when the IRS reaches out to the taxpayer’s bank and puts a hold on all its transactions for 21 days after which the bank deducts what is due to the IRS and send it, property seizure where the IRS takes possession and ownership of a property, sells it, and uses the proceeds to offset the tax debt.
EFFECTS OF A TAX LEVY ON YOU.
- It may reduce your paycheck: This is due to wage garnishment and this tactic ensures that your employer deducts a huge amount of your paycheck and reverts the money to the IRS leaving you with peanuts every month.
- Your bank accounts may be frozen: If the IRS uses a bank levy on you, then your bank account may be frozen for 21 days. If you refuse to work things out with the IRS within that period then the bank may send some or all of your money to the IRS.
- Your properties may be sold: You may risk having your properties and inheritance being sold by the IRS if you refuse to resolve your tax debt. This is usually the last resort, so it is advisable to resolve the tax debt before it declines to this stage.
- Pay your tax bill: This is the best time to pay your tax bill. If you can afford to, it is very important that once you receive a levy, you pay your tax bill.
- Get on an IRS payment plan: This will help you and the IRS come into a feasible agreement on how you intend to repay the debt. You can get started by visiting the website and submitting an application.
- File an appeal: You can file an appeal to the IRS if you want a review on a tax levy. This ensures you get a hearing if you believe you do not deserve a tax levy.
- File for bankruptcy: This is the last resort when every other solution fails and the taxpayer is incapable of settling their tax debts. Although bankruptcy is not the best option, it may eventually get rid of the tax debt. However, it requires a lot of procedures and processes.
Now that we have established the difference between tax liens and tax levies. It is important to note that paying your tax as at when due prevents you from going through any of these situations. It also saves you a lot of time, money and prevents your assets from getting sold. Hence, it is important to ensure that you resolve any tax issue immediately you notice it before it creates a bigger problem for you.