What Are Government Tax Liens and How Do They Work?

A government tax lien is a legal claim against a taxpayer’s property for a delinquent tax debt. Federal, state, or local governments can place this lien on an individual or business, which secures the government’s interest in the property as collateral. The lien gives the government a priority claim on the taxpayer’s assets over many other creditors and publicly establishes the debt.

How a Government Tax Lien Is Created

The creation of a tax lien follows a specific legal sequence. The first step is the tax assessment, where the government officially records the tax liability on its books. Following the assessment, the government must issue a “Notice and Demand for Payment,” a bill that clearly states the amount of taxes owed and requests payment. This notice is a prerequisite for further collection action.

A lien arises automatically by law when the taxpayer neglects or refuses to pay the full tax debt within the timeframe specified in the notice. To make the claim public and establish its priority against other creditors, the government files a “Notice of Federal Tax Lien” (NFTL) in public records. This public filing is what makes the lien visible to lenders, credit agencies, and potential buyers of the property.

Federal State and Local Tax Liens

Tax liens can be imposed by different levels of government, each with distinct characteristics and scope. The authority imposing the lien determines which assets are affected and the specific rules that apply.

Federal Tax Liens

A federal tax lien, filed by the Internal Revenue Service (IRS), is governed by federal law and attaches to all of a taxpayer’s property and rights to property. This includes not only current assets like real estate and vehicles but also any assets acquired during the life of the lien.

The IRS makes its claim public by filing a Notice of Federal Tax Lien (NFTL) with local and state authorities, such as a county recorder’s office. The filing of the NFTL secures the government’s place in line for payment, often ahead of other lenders or creditors.

State Tax Liens

State governments also have the authority to place liens on a taxpayer’s property for unpaid state taxes. These can include state income taxes, sales taxes collected by a business, or employment taxes. The process for creating a state tax lien often mirrors the federal system, typically requiring an assessment, a notice to the taxpayer, and a failure to pay.

The specific rules for state tax liens can vary significantly from one state to another. A state lien may attach to all of a taxpayer’s property within that state, or it may be more limited in scope. The public document filed by a state is often called a “state tax warrant” or “state tax execution,” which serves the same purpose as the federal NFTL.

Local Tax Liens

Local governments, such as counties or municipalities, most commonly file tax liens for unpaid property taxes. The local taxing authority records the lien against the property in the local land records.

Unlike federal and most state liens, a local property tax lien attaches only to the specific piece of real estate for which the taxes are delinquent. These liens hold a high priority and, if left unresolved, can lead to the local government foreclosing on and selling the property to satisfy the tax debt.

Impact on Assets and Credit

The filing of a public tax lien has significant financial consequences. It encumbers a taxpayer’s property, complicates financial transactions, and can damage their ability to secure credit.

A tax lien attaches to nearly all of a taxpayer’s current and future assets. This includes tangible property like real estate and vehicles, as well as financial assets such as bank accounts and investment portfolios. The lien also extends to business property and accounts receivable, making it difficult for a business to operate effectively.

The presence of a tax lien creates an obstacle for real estate transactions because it creates a cloud on the title. Before a sale can be completed or a new mortgage can be secured, the tax debt must be paid to clear the title. This often means the proceeds from the sale must first be used to satisfy the lien.

A Notice of Federal Tax Lien is a public record but will not appear on consumer credit reports from the major credit bureaus, a change implemented in 2018. Therefore, it does not directly impact a credit score. However, lenders, landlords, and employers can still discover the lien through a public records search, which can make it difficult to obtain new credit, such as a mortgage or auto loan.

A lien should be distinguished from a levy. A lien is a legal claim securing the government’s interest in your property, while a levy is the actual seizure of that property to satisfy the debt. A lien establishes the government’s right, and a levy is the enforcement of that right, such as garnishing wages or seizing bank funds.

Options for Resolving a Tax Lien

When facing a tax lien, several options are available to address the issue. These strategies range from paying the debt in full to negotiating alternative arrangements with the taxing authority.

• Pay the debt in full. The most direct way to resolve a lien is to pay the tax debt in full. Once the liability is fully paid, the IRS is required to release the lien within 30 days by filing a Certificate of Release of Federal Tax Lien. This document is filed in the same public records as the original notice, showing that the government no longer has a claim on the taxpayer’s property.
• Apply for a discharge of property. A discharge removes the lien from a specific piece of property, even if the tax debt has not been fully paid. This is often used when a taxpayer needs to sell a home, but the sale price is not enough to cover the entire tax bill. By applying for a discharge, the taxpayer can complete the sale, with the net proceeds typically going to the IRS. The lien remains in effect on the taxpayer’s other assets.
• Request subordination. Subordination is a process where the IRS allows another creditor to move ahead of its lien in priority. This does not remove the lien but can make it easier for a taxpayer to obtain a loan or refinance a mortgage. The primary purpose is often to secure funds that can then be used to pay down the tax debt.
• Seek a withdrawal. A withdrawal removes the public Notice of Federal Tax Lien from the record. Unlike a release, a withdrawal does not mean the debt is paid; the taxpayer is still liable for the amount owed. The IRS may grant a withdrawal if the notice was filed in error, if the taxpayer enters into a direct debit installment agreement, or if withdrawal is in the best interest of both the taxpayer and the government.