Tax Liens: What They Are and How to Avoid Them

Like most people, you probably shiver with fear when you receive a notice from the IRS. This is because it’s mostly about collecting what you owe them. Besides, what else can the taxman ask from you besides money? And as you know, no one really likes paying taxes even though we have the legal obligation to do so. One major notice that you need to be aware of is a tax lien. You should know what it is, how it can impact you, and what ways you can avoid it. Tax Crisis Institute can help!

What’s a Tax Lien?

A tax lien refers to a legal claim by the government on your individual or business property after you have intentionally failed to pay your tax bill. We are using the term intentionally to show that they don’t just seize your property after an overnight notification. You are normally offered several notices at varying intervals and failure to observe them is regarded as an intentional act. The enforcement of a tax lien will see not just your physical property seized but also your finances. The issuance and enforcement of the tax lien is a duty of the IRS. If you are not careful, a lien could lead to criminal prosecution.

How Does it Impact You?

Your property and finances are not the only things affected. Actually, a tax lien could have serious implications on your credit report. Even after paying your tax debt, a tax lien can show up on your credit history for nearly 7 years. You have to know that a tax lien is a public record and so it doesn’t just disappear after paying up what you owe the taxman.

If the lien is enforced against a business, it could negatively affect its credit score. Simply, it may be hard for lenders to grant your business money. So, the lender is likely to hold back until you pay the tax debt and after the tax lien is removed. Additionally, the lien is attached to your existing business properties and account receivables. Literally, you relinquish your business rights from the time that the lien is enforced.

How is the Lien Issued?

Before the IRS enforces the lien, they’ll send you a number of notices. You can prevent the taxman from claiming your assets if you do something about these notices, as we’ll see later. But for now, you should know that a tax lien is issued in the following four steps:

  • Notice for Tax Bill – Also known as Demand for Payment, this notice is issued the moment that the taxman realizes that your taxes are overdue. It’s meant to demand that you should pay up. It shows the exact amount that you need to pay, including the accumulated interests. It also shows the penalties that apply to you in case you fail to pay.
  • Payment Arrangement – Once the IRS realizes that you have not been able to pay your tax debt even after receiving the first notice; they’ll send you a second notice to help you explore your payment arrangements. For example, you may be provided with the option of paying in installments if the debt is too big to settle at once.
  • Notice of Tax Lien – If you fail to do anything after receiving the first two notices, then the IRS will send you a third notice, the actual lien. As already mentioned, the lien notifies you about the IRS’s intentions to seize your property. The issuance of this notice happens 10 days after the first notice.
  • Notice of Seize – Any time after the issuance of a tax lien, the IRS can claim your property. They will send you a final notice which shows that they have the legal right to seize your assets, bank accounts, personal earnings, and retirement money.

How Can You Avoid It?

The easiest way to avoid a tax lien is to pay your tax bill. If you do it before the issuance of the tax lien notice, the IRS will have 30 days to remove the tax lien and to clear your name. Then, you’ll have your credit score cleaned. However, some circumstances and financial situations may prevent you from paying a tax bill in full. Here are the options to consider:

  1. Opt for an Installment Agreement

After receiving the second notice, you can easily prevent a tax lien if you opt for an installment payment plan. You’ll need to work out a comfortable installment plan with the IRS. Of course, you have to provide a genuine reason why you can’t pay your tax bill in full.

  1. Ask for a Withdrawal Hearing

There are a few situations where appealing a tax lien is the smartest things to do. They include:

  • If the tax lien was issued illegally or by mistake
  • If you are already on an installment agreement that you are adhering to

In these cases, you can ask for its withdrawal. The advantage of this is that the record is totally withdrawn like it never existed.

  1. Request for an OIC

Another alternative to an installment agreement when you can’t pay your tax bill in full is the IOC (Offer in Compromise). Unlike an installment plan, the IOC allows you to pay your tax bill for less. However, you have to prove a case of financial hardship to qualify for an IOC. It doesn’t just apply to anyone who can’t pay their tax debt.

  1. Delay the Collection

Legally, there are several ways to delay property collection. For one, you can file for a CNS (currently Not Collectible). This status protects your property from the collection by the IRS. Simply, it prevents the tax lien from being enforced. Two, you can request a payment extension. This is a payment plan that allows you an extended period to pay the tax bill. You may be offered 60-120 days depending on your circumstance. By delaying the collection, you are delaying the tax lien.

  1. File for Bankruptcy

If worse comes to worst, then your last option should be filing for bankruptcy. Though it does always work, filing for bankruptcy may be your only way out of the tax debt.

Closing Thought:

A tax lien can be damaging to individuals and businesses. So, it has to be addressed with urgency once the notices start coming. If you are not sure about anything, then talking to a tax expert is a wise thing to do. Tax Crisis Institute can help you avoid its enforcement and be able to protect your assets in the end. Contact us today!

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