Dealing with Tax Liens

First, what exactly is a tax lien?

A tax lien is essentially the government putting a claim on your property when you fail to pay taxes owed. This doesn’t mean your property will be seized, it just means the taxing entity gets first right to your property over other creditors. It can have significant consequences on your credit since it becomes a public record and shows up on your credit reports.

Are state and federal tax liens the same thing?

Basically, yes. Bot federal and state taxing authorities can place a lien on your assets, either for unpaid property, income or other delinquent taxes.

Do tax liens affect your credit score?

Yes. Having a tax lien means the government has a legal right to your property — real estate, personal property, financial assets — because you have failed to pay a tax debt. The tax lien appears on your credit report in the public records section and can have a seriously negative effect on your credit scores, similar to a bankruptcy or a judgment. And even worse, it means they can put your home into a tax sale …

What is a tax sale?

If you do not pay your property taxes and a tax lien is placed on your home, the taxing authority has the right to try to recoup the amount you owe by seizing your home and selling it. This is known as a tax sale, and all states have laws that allow local government entities to sell your home through the tax lien process to collect your delinquent taxes.

When you pay or settle a tax debt, how long does it take the IRS to release the lien? What is the procedure for doing so?

The statute says that they have 30 days to release the tax lien. See Internal Revenue Code 6325. That’s how it’s supposed to work, but in reality they often overlook it and it doesn’t get done. If this happens, then a taxpayer can contact the Lien Desk by phone at (800) 913-6050 or by fax at (859) 669-3805. If you look at a copy of an actual Form 668(Y)(c) Notice of Federal Tax Lien, you will notice a bold black box about halfway down the page on the left-hand side. It says that if the lien is not refiled by the refile date in column (e), then the lien is releasable on its face. That sounds complicated, but what it means is that if another lien wasn’t filed before the dates in column (e), then the lien is no longer enforceable. This sometimes complicates matters because the IRS is often reluctant to issue a release for an expired lien.

Does the IRS automatically notify the credit agencies that the lien has been released? If not, what do consumers need to do to make sure their credit files are updated?

When the Certificate of Release gets filed in the courthouse where the lien was originally filed, theoretically the major credit reporting agencies should pick up the release. A much better practice would be to order three official copies of the release and proactively send them into the three credit bureaus — Equifax, Experian and TransUnion. It could take months or years for the bureaus to automatically pick up the release.

What if you find an old tax lien on your credit report and aren’t sure you paid it?

What is the procedure for investigating it with the IRS?

You can call the IRS to inquire, but this can sometimes exacerbate a problem that has long been dormant. The best way by far to investigate such a situation is to contact a tax professional who is well versed in handling tax controversy cases and have him or her file a Freedom of Information Act request. This is a very discreet way to inquire without setting the IRS collection machine loose on a taxpayer.

Are there any tips you would offer to consumers who find tax liens on their credit files?

Be very cautious about contacting the IRS about tax liens that may pop up. You can wake the sleeping giant and really turn your financial life into a living hell. It’s best to get professional help unless you are sure that you have paid off the lien and it’s just a matter of getting a release to clear up that issue.

What is the easiest way to release a IRS TAX LIen?