Call for a free consultation
(877) 777-7430

When Does the IRS File a Tax Lien?

When Does IRS File a Tax Lien

Get a Free Consultation

  • This field is for validation purposes and should be left unchanged.

If you or your business owe money to the IRS, the fear of a tax lien might keep you up at night.  Will the IRS file a tax lien?  When will the IRS do so? What will happen once the IRS files a lien?

Before I answer these questions, is important to understand the following definitions regarding liens:

A “tax lien” means a taxing authority has a claim against all of the taxpayer’s rights to property.

A “filed tax lien” means the taxing authority filed a public notice stating a taxpayer owes tax liabilities.

The taxing authority usually files the public notice in the taxpayer’s county of residence for individuals or taxpayer’s county of registration for businesses.

Although the IRS stopped reporting tax lien filings to the major credit bureaus, many lenders check to see if any party filed liens against a borrower.
A “lien release” means the taxing authority has no interest against the taxpayer.

A lien release basically means the taxes covered by the liens are satisfied (e.g., paid off, settled, or the taxing authority wrote off taxes because the collection statute of limitations expired).

A “lien withdrawal” means the taxing authority only removed its public notice of its filed lien but the taxing authority still has an interest against the taxpayer. A lien withdrawal basically means the taxes covered by the lien are still owed but the taxing authority no longer wishes to publicly disclose this.

You may also wonder, “Why will the IRS file a lien in the first place?”

The IRS files a tax lien mainly to obtain priority against other creditors of the taxpayer.  For instance, if you own a home and you have a mortgage before the IRS files a lien, the IRS’ lien filing will place the IRS second in line to receive proceeds if you sell your home.  See this Fortress article on further information on how to sell an asset such as a home subject to an IRS tax lien.

Basically, a creditor that files its lien interest against a party before other creditors file, obtains a priority against these other creditors (aka the creditor gets to collect first from the party before other creditors).  In legal speak, this is called “first in time, first in right.”  However, IRS tax liens may sometimes retain priority over other creditors even if those other creditors filed their interest before the IRS.  For additional information about lien priority interests see this Fortress article.

Avoid IRS Tax Lein Filing

Now that I covered the basic definitions of a tax lien and why the IRS files a lien, I will discuss why you may want to avoid a lien filing.

The general reason on why an individual or a business may want to avoid a lien filing basically comes down to the fact that the lien filing reflects negatively on that individual or business that owes taxes.  For instance, for a business taxpayer, the lien filing may deter potential parties that want to purchase or invest in the business; may deter lenders from extending credit to the business such as factoring loans, equipment loans, or SBA loans; and may deter existing and prospective customers from doing business.  Further, for an individual, the lien filing may prevent the individual from qualifying for a loan such as a mortgage; may prevent the individual from refinancing her or his mortgage; may prevent the individual from selling his or her home unless the IRS receives the left-over proceeds from the home sale; may diminish her or his job security (such as if the individual works as an investment advisor and must disclose the lien filing with FINRA, a federally authorized regulatory body, and with her or his employer); and may cause lenders to close or reduce the individual’s available credit or to increase the interest rate on available credit.

Note, that the IRS may file a tax lien at any time after the IRS (1) assesses the taxes, (2) gives notice of taxes due to taxpayer, and (3) demands payment from the taxpayer. The IRS easily meets these three conditions.  For instance, you receive notice of taxes due and the IRS demands payment the moment you file your Form 1040 (the Form 1040 will both show if you owes taxes and state you must pay the taxes due). The IRS assesses the taxes the moment it posts the Form 1040.  In short, simply filing a return with taxes due will give the IRS the right to file a tax lien as soon as it posts the return.

In reality, the IRS usually waits to send multiple collection notices before it files a lien which can take months and months.  Also, the IRS sometimes neglects to file a lien—yes, the IRS sometimes fails to follow its own procedures to its own detriment.

You may think to yourself, “Wait a minute, am I better just not filing my taxes?”  Well, you may avoid the lien filing, but if you do not file the tax return on time, the IRS will charge 5% of the unpaid taxes for each month you are late in filing up to a maximum of 25% of your unpaid taxes.  The IRS will not only charge you these late filing penalties but also tack on interest on the charged penalties.  Two words succinctly describe the IRS’ absurd interest and penalties: Highway Robbery.  See this Fortress article for additional information regarding IRS penalties.

Thus, if you cannot file the tax return by the filing deadline, file an extension so you at least avoid the late filing penalties (assuming you file by the extension deadline which is usually October 15th).  See this Fortress article on to remove penalties.

Further, the IRS reserves the right to file substitute returns on your behalf for any missing tax returns.  You do not want the taxing authorities to file substitute returns because substitute returns usually grossly overestimate the taxes due.  Further, the collection statute of limitations clock (i.e., generally, 10 years from the date the IRS assesses the taxes) does not start ticking until the returns are filled.  See this Fortress article for additional information on the collection statute of limitations.

In short, the longer you wait to file the tax returns, the more you will owe in interest, penalties, and taxes (in case of substitute returns) and the more time the IRS will have to collect from you.  See this Fortress article on the top five deadliest mistakes made by indebted businesses.

Please note, because a tax lien filing is public record, unfortunately, solicitors hound these public records to look for lien filings.  Once these solicitors find tax lien filings, they will try contacting you to sell you whatever it is they want to sell.  Some of these solicitors use questionable sales tactics by sending you threatening non-IRS letters that make it sound as if the IRS is going to take collection action if you fail to respond to the solicitor.

Also note, with a few exceptions, the IRS rules require the IRS to mail a copy of the tax lien filing to the taxpayer based on the IRS’ last known address for the taxpayer.

The IRS rules for not filing a lien in the first place differ from its rules for withdrawing or releasing a lien once the IRS files a lien.  This should not come as a surprise, but once the IRS files a lien, one will encounter greater difficulty in convincing the IRS to withdraw or release the lien as opposed to avoiding the lien filing in the first place.

Generally, with some exceptions, the IRS will not file a lien in the following cases:

  • Tax liabilities equal less than $10,000.
  • Tax liabilities will likely go away in the near future for instance when the IRS approves to settle the taxes by way of an Offer in Compromise, the IRS received full payment for the tax liabilities but needs time to post it, or the IRS genuinely doubts the validity of the tax liability.
  • Tax liabilities owed by a defunct business with zero assets.
  • Tax liabilities owed by a deceased individual with zero assets.
  • Tax liabilities included in a bankruptcy filed by a taxpayer.

In addition, generally, with some exceptions, an individual may avoid a lien filing if the tax liabilities equal $50,000 or less and the individual sets up an installment agreement with a term of six years or less; and, with some exceptions, a business may avoid a lien filing if the tax liabilities equal $25,000 or less and the business sets up an installment agreement with a term of two years or less.  In addition, and I am simplifying here, the IRS may decide to not file a lien if doing so will diminish the taxpayer’s ability to pay back the tax liabilities.  In IRS speak, the IRS calls this “hampering collection.”

As far as after the IRS files a lien, see this Fortress article discussing ways to remove the lien filing.

Obviously, the IRS, like most government agencies, makes things difficult for taxpayers with confusing rules, and with IRS employees who do not understand what they are doing or who misinterpret the IRS’ own rules.  As such, it is not uncommon for the IRS to file a lien even though it filed the lien against its own rules.  Our tax dollars work hard at the IRS.  The IRS wastes a good amount of the taxes collected with outdated technology—the IRS still uses faxes—and inefficient methods—the IRS still uses manual processes for no logical reason.  Afterall, if Amazon and Apple can provide great customer service for millions of customers, why can’t the IRS do the same?

If you need assistance with resolving tax issues including tax liens,
call Fortress Tax Relief at 877-777-7430.

We have caring and knowledgeable professionals and staff, who would be happy to answer any questions you might have, and to outline a solution tailored to your specific needs and circumstances. There is no charge for a telephone consultation, so pick up the phone and give us a call!

About the Author

For a Free Consultation