Tax Liens Explained: What They Are, How They Affect You, and How to Avoid Them

What Is a Tax Lien — And What Can You Do About It?

If you’ve received a notice about a tax lien, it’s understandable to feel anxious — or even confused. Tax liens are serious, but they’re also manageable when you understand what they are and what steps you can take next. Let’s break it down.

What Is a Tax Lien?

A tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. It doesn’t mean the government is seizing your property (that would be a levy), but it does mean they have a secured interest in it.

Think of it like a mortgage deed of trust: when you borrow $100,000 from a bank to buy a home, the bank files a deed of trust with the county to secure its interest in your property. The IRS operates similarly. When you owe a tax debt, they file a Notice of Federal Tax Lien to secure their interest in any property you currently own — or may acquire in the future.

This public filing alerts other creditors that the government has a legal right to your assets, including real estate, personal property, and financial accounts.

What Triggers a Tax Lien?

There are several factors that can trigger a tax lien, and they may vary depending on whether you’re dealing with the IRS or a state tax agency. In general, when it comes to the IRS, a tax lien is typically filed when the total tax debt exceeds $10,000 across all years owed.

Here’s how the process generally unfolds with the IRS:

1. Assessment: The IRS (or your state) assesses your tax liability.
2. Notices: The IRS sends a series of notices—starting with a “Notice and Demand for Payment.” They are legally required to send multiple notices before moving forward with a lien.
3. No Payment: If you fail to pay the balance and the proper notice sequence has been completed, the IRS can file a Notice of Federal Tax Lien for debts over $10,000.
4. Other Triggers: Not all liens are automatic. Certain actions, or inactions, can unintentionally trigger one. For example:
   • Setting up a payment plan that doesn’t qualify for lien exceptions (like those without direct debit if balance is over $25,000)
   • Choosing a monthly payment that’s too low to meet IRS standards of the Fresh Start program.
   • Entering into an agreement for a balance too high to qualify for streamlined processing (over $50,000 aggregate).

In some cases, the IRS may choose to file a lien sooner than expected if the taxpayer doesn’t follow best practices when requesting a payment plan.

A good tax practitioner will help set up a strategic plan to prevent a tax lien when possible:

• Determine how much of the liability you can afford to pay upfront
• Structure a payment plan that qualifies for lien avoidance
• Guide you through the best steps to minimize the risk of a tax lien entirely

 

How a Tax Lien Affects You

A tax lien can have several serious and lasting consequences, even though it doesn’t result in immediate asset seizure. Here’s how it can affect you:

• Credit Impact: While federal tax liens no longer appear on consumer credit reports, many state tax liens still do. Even so, lenders may still uncover liens through public records, which can affect your ability to borrow.
• Difficulty Selling or Refinancing Property: Lenders typically require first lien position. If you attempt to refinance or purchase a property, the tax lien must either be paid, released, or subordinated. Otherwise, the new mortgage or buyer will be recorded behind the tax lien, making the transaction more difficult or even impossible.
• Interference with Business Assets: If you’re self-employed or run a business, a tax lien may encumber business property, inventory, or receivables, making it harder to operate or grow.
• Limited Access to Credit: A lien signals to lenders that you’re a credit risk, often resulting in denials of new credit lines, loans, or financing.
• Impact on Professional Licenses: Certain professional licenses, such as for insurance agents, mortgage brokers, CPAs, and others, may require that tax liens be resolved or cleared before a license can be issued or renewed. Be sure to check with your state licensing board for specific requirements.
• Priority in Asset Sales: If you sell a property after a tax lien is filed, the IRS or state will be paid before you receive any proceeds and potentially before other creditors, depending on the order in which their claims were recorded.

Let’s say you have the following:

• A first mortgage of $100,000 recorded on January 1, 2020
• A federal tax lien of $50,000 recorded on January 1, 2024
• You sell the home for $125,000 after selling expenses on January 1, 2025

The proceeds would be distributed like this:

1. $100,000 to pay off the mortgage holder (first lien position)
2. $25,000 to the IRS (next in line)
3. $0 to you, the homeowner

In this case, you’d still owe the IRS $25,000, which would remain on your record until paid in full or otherwise resolved.

Tax Lien vs. Tax Levy

These terms are often confused, but they mean different things:

• A lien is a claim to your property.
• A levy is an action or seizure to take your property.

Think of a lien as a warning sign that collections could escalate. The IRS is putting everyone on notice that it has first rights to your property if it comes to that.

How to Find Out If You Have a Tax Lien

If a tax lien has been filed, you should receive a Notice of Federal Tax Lien (NFTL). But you can also find out by:

• Checking public records in your county or state
• Reviewing IRS transcripts (you can request them online at IRS.gov)
• Contacting a tax professional to investigate for you
• If buying or selling a home, the closing agent will do the search for you and they will be reflected on the title report

Some people don’t realize a lien has been filed until they apply for a mortgage, business loan, or refinance and get denied.

Can You Get Rid of a Tax Lien?

Yes — but it requires action. Here are your main options:

1. Pay the Tax Debt in Full

Once paid, the IRS will release the lien within 30 days. This is the cleanest way to remove a lien, but it’s not always possible upfront.

2. Set Up a Payment Plan

If you can’t pay in full, the IRS may withdraw the lien after you enter into a Direct Debit Installment Agreement and meet certain conditions. This can also help you avoid future collection actions.

To qualify for lien withdrawal while on a payment plan, you generally must:

• Owe $25,000 or less
• Agree to automatic monthly debits
• The payment will need to full pay the total liability withing 60 months
• Have made at least 3 consecutive payments
• Be in full compliance with all tax filings

If you do all of the above, it typically takes them about 2-4 months to process the request for lien withdrawal.

3. Apply for a Lien Withdrawal

A withdrawal removes the public notice of the lien and shows that the IRS is no longer competing with other creditors for your property. You still owe the tax, but the lien’s grip on your assets is eased.

Form 12277 (Application for Withdrawal of Filed Notice of Federal Tax Lien) is the IRS form used to request this.

You can find the form 12277 by following this link: Download IRS Form 12277

4. Request a Discharge or Subordination

In certain situations, especially real estate transactions, you may need to request a discharge or subordination of a tax lien. These options are more technical, require extensive documentation, and often involve negotiation with the IRS. Because of the complexity and potential time sensitivity, it’s highly recommended to work with a qualified tax professional to guide you through the process.

What’s the Difference?

• Discharge of Property from Lien: This removes the lien from a specific property, which can allow you to sell or transfer the property without the IRS claim interfering. The lien remains in place on your other assets or future acquisitions.
• Subordination: This does not remove the lien, but it allows another creditor (such as a mortgage lender) to move ahead of the IRS in lien priority. This can make it possible to refinance an existing loan or secure new financing.

These tools are often used when a taxpayer:

• Needs to sell a home but wants to ensure the lien doesn’t block the sale
• Wants to refinance a mortgage to lower monthly payments, which can free up cash flow for IRS payments
• Is doing a cash-out refinance to make a lump-sum payment toward the tax debt (even if it doesn’t pay the full amount)

To be approved, you’ll need to show the IRS that the request is in their best interest, typically meaning it will increase the likelihood of repayment. If you can demonstrate that the transaction will allow you to pay down the tax debt or maintain regular payments, the IRS is more likely to approve the request.

How Long Does a Tax Lien Stay in Effect?

If unpaid, a federal tax lien generally remains for 10 years from the date the tax was assessed, unless it is released or withdrawn earlier.

However, certain actions (like bankruptcy or entering into certain agreements with the IRS) can extend the collection period.

Don’t Ignore a Tax Lien

Ignoring a lien won’t make it go away, in fact, it could turn into a levy and lead to even more severe consequences. The good news? There are always options. And the earlier you act, the more choices you’ll have.

Working with a tax professional can help you:

• Understand your rights and obligations
• Identify the best resolution strategy for your situation
• Communicate effectively with the IRS or state tax agency

Need Help With a Tax Lien?

At Real Tax Remedies we help individuals and business owners resolve tax issues, including liens, every day. Whether you’re trying to prevent a lien, get one removed, or understand your best options, we’re here to walk you through it with clarity and confidence.

📞 Contact us today for a confidential consultation and get back on track (208) 906-2464.

IRS information regarding federal tax liens: Understanding a Federal Tax Lien