Interesting Facts about Federal Tax Lien

Posted on October 7, 2022

Interesting Facts about Federal Tax Lien

A federal tax lien is a collection action under which the IRS seizes the property and/or assets of taxpayers to ensure payment of tax debt. Tax lien and tax levy are the most aggressive collection actions of the IRS. To place a lien, the IRS does not need court permission.

Forbes shares some interesting facts about federal tax lien that will help taxpayers understand how it is and how it can affect them.

“A Federal tax lien is a “secret” lien, known only to the Internal Revenue Service and the taxpayer,” Forbes explains, “The Internal Revenue Service it is forbidden by law from saying anything about the lien to any person other than the taxpayer, with two exceptions.   First, it can bring a judicial proceeding to foreclose the Federal tax lien.

“Second, unless the balance is de minimis, the Internal Revenue Service issues a notice of Federal tax lien (“NFTL”) against the taxpayer, and records it in the register of deeds’ office in the county of the taxpayer’s residence.  The Internal Revenue Service records NFTLs as a matter of practice, to prevent third parties who purchase property from the taxpayer, or lend money to the taxpayer taking a security interest in the taxpayer’s property, from acquiring an interest in the taxpayer’s property superior to the Federal tax lien.”

Federal liens are included in credit reports, Forbes goes on to explain. This can dramatically affect the taxpayer’s credit standing, dropping their credit score as much as 120 to 150 points. Bad credit can affect a job-seeker’s eligibility when looking for work as employers are increasingly checking candidates’ credit before hiring them. Forbes writes, “A recorded NFTL can affect the taxpayer’s employability in certain industries, such as financial services, or tax administration.”

A lien can be damaging. To make lien less draconian for taxpayers, the IRS began the Fresh Start initiative. Under the Fresh Start initiative for federal tax liens, the IRS has increased the filing threshold from $5,000 to $10,000. In special circumstances, however, the IRS may place a lien on amounts less than $10,000.

The resolution of a tax lien requires professional help. According to Forbes, “Resolution may include paying the account balance in full, entering into an installment agreement with the Internal Revenue Service, or persuading the Internal Revenue Service to post the account as currently not collectible (“CNC”).

“Once a Federal tax lien attaches to property, it remains notwithstanding discharge of the taxpayer in bankruptcy.  This is one of several reasons why bankruptcy rarely if ever is an effective means of dealing with tax liabilities.  Indeed, there is no reason to attempt to discharge taxes in bankruptcy.  If a taxpayer is unable to pay a Federal tax assessment, the Internal Revenue Service will enter into an installment agreement with the taxpayer for a monthly payment he can afford or, if he cannot afford a payment, post the account as CNC.”

Nonpayment of tax debt eventually leads to collection actions such as liens and levy. Therefore, taxpayers must ensure that they resolve their tax debt as soon as possible.