If you fail to pay your taxes in full, the IRS has the right to file a tax lien on all your properties. A tax lien is a legal claim the government has on any or all of your properties so that you cannot sell it without government approval. The properties that can be affected by a tax lien include real estate, personal property and financial assets. The IRS will consider filing a lien on your property if they send a Notice and Demand for Payment and you neglect or refuse to pay the bill on time.
The tax lien is in the form of a public document called the Notice of Federal Tax Lien that informs all your creditors that the government has first legal right over your property. When your property is subject to a lien, the obvious thing to do would be to have it removed. And the best way to do so would be to pay up your tax debt in full. Besides that, there are other ways to deal with a lien.
If you find a buyer for your property, you may apply for a discharge of the lien. A discharge would allow you to sell the property. To apply for a discharge, use Publication 783 Instructions on How to Apply for a Certificate of Discharge from Federal Tax Lien.
Another option is to apply for subordination. This does not remove the lien but allows other creditors to have rights over the property ahead of the government. This is particularly useful to obtain a loan or mortgage using the property as collateral. More information on this is found in Publication 784 Instructions on How to Apply for a Certificate of Subordination of Federal Tax Lien.
Finally, you may apply for a withdrawal. This means the IRS no longer competes with other creditors over your property and effectively removes the public notice. Needless to say, a withdrawal will only be granted if it is to the government’s advantage. To apply for a withdrawal, use Form 12277 Application for the Withdrawal of Filed Form 668(Y) Notice of Federal Tax Lien.
So long as the lien is in force, all your properties and future properties (including securities and vehicles) cannot be sold without prior approval from the government and once sold, the proceeds have to go to settling your tax debt first. If your properties are under a federal tax lien, it would restrict your chances of obtaining credit unless you successfully obtain subordination. If you run your own business, the lien also attaches to all your business assets and to all rights to business property, including accounts receivable. Even if you file for bankruptcy, your tax debt, lien, and Notice of Federal Tax Lien may continue after the bankruptcy.
Note that a lien is different from a levy. A lien imposes the government’s first right on your property whereas a levy means your property is levied or seized to be sold to pay your tax debt. The best way to avoid a lien or a levy is to always stay current with your tax debt and pay it off in full. If you have difficulty doing so, you should talk to the IRS who would allow you to pay your taxes in installments.