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What is a Federal Tax Lien?

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What is a federal tax lien? A Federal Tax Lien allows the IRS to put a lien against taxpayer's assets for unpaid back taxes.

What is a Federal Tax Lien?

A federal tax lien is used to put a lien on property, or any other assets, as collateral for unpaid back taxes. The Internal Revenue Service (IRS) can issue federal tax liens to secure payment of those unpaid back taxes.

A federal tax lien does not allow the government or the IRS to seize any assets. The government has to issue a tax levy in order to seize any property.

When the IRS places a federal tax lien, they tell all states and creditors that they are placing a lien and they are first in line for any payments. If a federal tax lien is placed against you, it will significantly lower your credit.

You can learn more about how federal tax liens can affect you on the IRS’ website.

Federal Tax Lien Scenario

Doug is a small business owner. He hasn’t paid his personal taxes in five years. The IRS has filed a federal tax lien against Doug to try and get him to pay his back taxes.

The first step the IRS will take will to be to notify Doug’s other creditors; the federal tax lien takes precedence over any other creditors. Then, the IRS will place the federal tax lien against his bank accounts, car, home and against his small business business. Although Doug has paid his business taxes, the IRS can still hold a lien against his small business for payment on his personal taxes . Once the federal tax lien is issued it will also lower Doug’s credit score. This will make it more difficult for Doug to take out any new loans.

Doug have three options in order to have the federal tax lien removed. The first option is to pay off the debt in full. The second option is to get the debt dismissed in bankruptcy court. Finally, debtors can reach a settlement with the IRS to pay or forgive the debt.

Doug is the sole proprietor of his small business so it is considered an asset that the IRS can go after when trying to get him to pay his back taxes. If Doug decides to choose to declare bankruptcy the IRS will asses if his business to determine if it has any value. If they determine that there is value in the business, then it can be taken. However, if there isn’t value in the business then the IRS won’t go after it and Doug could continue to run his business after the bankruptcy.

In order to make sure he can still run his business, Doug chose to pay his back taxes. The IRS will release the lien 30 days after the debt it paid in full.

 

What is a federal tax lien? A Federal Tax Lien allows the IRS to put a lien against taxpayer's assets for unpaid back taxes.
Ben Sutton

Ben Sutton

Ben Sutton is the founder of Mazuma USA, an accounting firm providing tax, bookkeeping and payroll services to small businesses. Since founding Mazuma, Ben has established himself as an expert in the small business world. He’s still driven by that same desire to provide accounting help to all small businesses – from photographers, bloggers and creatives to lawyers, doctors, and dentists, everyone needs affordable accounting help. Ben is a Certified Public Accountant, and a member of the American Institute of Certified Public Accountants. But Ben considers his greatest achievement and credential to be his happy wife and four children.

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