From time to time you may come across liens and both Federal and State tax liens. A tax lien is a lien imposed by law upon a property to secure the payment of taxes. A tax lien may be imposed for delinquent taxes owed on real property or personal property, or as a result of failure to pay income taxes or other taxes.

What is a Lien?

A lien is the legal right of a creditor to sell the collateral property of a debtor who fails to meet the obligations of a loan contract. A lien exists, for example, when an individual takes out an automobile loan. The lien holder is the bank that grants the loan, and the lien is released when the loan is paid in full. Another type of lien is a mechanic's lien, which can be attached to real property if the property owner fails to pay a contractor for services rendered. If the debtor never pays, the property can be auctioned off to pay the lien holder.

If you are having work done on your house, the contractor may place a lien on your house for the value of the contract. When you pay for the contractor’s the lien is released.
If the Federal or State taxes remain unpaid, the tax authority can then use a tax levy to legally seize the taxpayer's assets (such as bank accounts, investment accounts, automobiles and real property) in order to collect the money it is owed. Tax liens are publicly recorded and may be reported to credit agencies. These two features of tax liens effectively prevent the sale or refinancing of assets to which liens have been attached, and prevent the delinquent taxpayer from borrowing money.

A federal tax lien has precedence over all other creditors' claims. It also affects the taxpayer's ability to sell existing assets and to obtain credit. The only way to release a federal tax lien is to fully pay the tax owed or to reach a settlement with the IRS. The IRS can seize the assets of a taxpayer who ignores a tax lien.

Avoiding liens.

Contact the number on the paperwork you receive informing you that you owe money to the government. You may be able to work out something better than you expect. For instance, sometimes the IRS will allow subordination, which lets other creditors like financial lenders take their debts before the IRS. This can make it easier to get a loan or mortgage. Sometimes the IRS will also allow an Offer in Compromise, which allows the taxpayer to satisfy the debt with a smaller amount.

It only makes matters worse to ignore the notices. If you can work out an installment agreement with the IRS or your state or municipality to pay the back taxes slowly over time, you may even avoid a lien. And if you do get one, at least you'll be making the debt smaller and getting out of the hole sooner.

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