Avoiding a Federal Tax Lien

Last week’s blog post described getting rid of a federal tax lien, which can happen when federal taxes go unpaid. This week, we address how to avoid a federal tax lien altogether. First, a refresher on the definition of a federal tax lien:


A federal tax lien is the government’s legal claim to real estate, personal property and financial assets when a taxpayer neglects or fails to pay a tax debt. The IRS files a public document, the Notice of Federal Tax Lien, to alert creditors that the government has a legal right to the property.


A federal tax lien impacts all aspects of a taxpayer’s finances:


  1. Assets— A lien attaches to all assets (i.e., securities and vehicles). Plus, it attaches to future assets acquired during the duration of the lien.
  2. Credit— A Notice of Federal Tax Lien may limit your ability to get credit.
  3. Business— The lien attaches to all business property and to all rights to business property, including accounts receivable.
  4. Bankruptcy— A Notice of Federal Tax Lien may continue after bankruptcy.


Avoiding a Tax Lien

Sounds simple, but you can avoid a federal tax lien by simply filing and paying all taxes in full and on time. If you cannot file or pay on time, do not ignore the letters or correspondence from the IRS. A federal tax lien isn’t filed until after the IRS has sent multiple notices and explanations about amounts due. IRS correspondence generally provides taxpayers the opportunity to make installment payments or other arrangements.


Lien vs. Levy 
A lien is not a levy. As described above, a lien secures the government’s interest in your property until you pay your tax debt. With a levy, the government actually takes your property to pay the tax debt. If you do not pay or make arrangements to settle your tax debt, the IRS can levy, seize and sell any property that a taxpayer owns or has an interest in.


Getting Help 
The best “help” is filing and paying all taxes and replying to all letters or correspondence from the IRS. If it’s too late for that, getting advice and counsel from a qualified tax professional is your next step.