Federal Tax Liens Explained: What You Need to Know


Janet Berry-Johnson, CPA


Reviewed by


July 1, 2024

This article is Tax Professional approved


Did you recently receive a notice from the Internal Revenue Service (IRS) about a federal tax lien? If so, you may be worried about what this means for you or your business.

A federal tax lien is the government's legal claim against your property when you don’t pay the taxes you owe. Federal tax liens apply to all assets, including real estate, personal property, and financial accounts. They ensure that the government gets paid before other creditors if you sell your property.

It might sound scary, but there are ways to address it.

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Highlights and key takeaways

  • A federal tax lien is the government's legal claim against your property due to unpaid taxes.
  • A lien secures the government's interest in your property, while a levy involves the government actually seizing assets.
  • Options to remove a lien include paying your tax debt in full, setting up an installment agreement, and other tax relief programs.

What’s the difference between a lien and a levy?

When you don't pay the taxes you owe, the IRS (and state tax authorities) have the power to place a tax lien on your assets and levy your assets. So what's the difference?

Tax lien

A tax lien is a legal claim by the IRS or a state tax authority against your property due to unpaid back taxes. It doesn't mean the government takes your property immediately. Instead, it lets creditors know the government has the right to take your property to pay off your tax debt.

The lien covers all your property, including real estate, personal property, and financial assets. It also attaches to any assets you acquire while a federal tax lien exists.

Tax levy

A tax levy is when the IRS or another tax authority seizes your property to satisfy your tax debt. If you ignore the tax lien and continue not paying your taxes, the government can legally take money directly from your bank accounts, garnish your wages, or seize and sell your property.

By addressing the lien promptly, you can avoid the harsher consequences of a levy.

What happens when the IRS puts a lien on you?

Receiving an IRS Notice of Federal Tax Lien can be scary, but it's crucial to face the problem head-on so you can resolve it without impacting your life or business.

Here's what happens when the IRS puts a lien on you:

It's tough to get credit

A tax lien doesn't appear on your credit report but is a public record.

Lenders and other financial institutions may find out about the lien and view you as a high-risk borrower, making it difficult to get new loans or lines of credit, get approved for a higher credit limit, or even lease property.

Trouble refinancing or selling property

The lien applies to all your current and future assets, including personal property like real estate, vehicles, and financial accounts, and business property like accounts receivable and equipment.

You likely won't be able to refinance your mortgage or other loans attached to your property until the IRS removes the tax lien. And if you sell any assets, the proceeds go towards paying off your tax debt before you see a cent.

Complicates business operations

A tax lien can make it tough to get approved for business loans or lines of credit to manage cash flow and growth.

Your suppliers and vendors might also be wary of extending credit or doing business with you, knowing the IRS has a claim on your assets.

How to remove a federal tax lien

The quickest way to remove a federal tax lien is to pay your tax debt. Once the IRS receives full payment, they'll release the lien within 30 days.

Of course, paying your tax debt in full isn't always feasible, so the IRS offers a few alternatives.

If you can’t pay your taxes

If you're unable to pay your back taxes, don't worry—here are a few tax relief options.

Request an installment agreement

An IRS installment agreement lets you to pay your tax debt in manageable monthly payments. While interest and penalties still accrue on the unpaid balance, the IRS won't levy your property as long as you make the agreed-on payments.

In some cases, the IRS may even withdraw the lien once you enter into the installment agreement.

Ask for penalty relief

Penalties increase the amount you owe, making paying off your tax debt tough. But penalty relief can reduce or eliminate those penalties.

You may qualify for penalty relief if this is the first time you've had IRS troubles or had a "reasonable cause" for failing to pay or file your federal tax return time, such as a natural disaster, death, medical emergency, or other extenuating circumstances.

Apply for an offer in compromise

An offer in compromise (OIC) allows you to settle your tax debt for less than the total amount you owe. You might qualify for an offer in compromise if you can't pay your full tax liability or doing so would create financial hardship.

You must meet strict qualification criteria for an OIC. When evaluating your offer, the IRS will consider your income, expenses, assets, and ability to pay.

Tax resolution services

Consider hiring a professional tax resolution service if you feel overwhelmed by the process. These services specialize in negotiating with the IRS on your behalf and can help you explore and apply for various tax relief options.

Just watch out for scams if you go this route. The tax resolution industry is rife with "OIC mills" that charge their clients steep fees and promise to help them settle their tax debt for "pennies on the dollar." In many cases, the people paying for these services don't qualify for an OIC or could get the same result by working directly with the IRS.

If you're a business owner and you've fallen behind on your tax filings due to incomplete financial records, getting caught up on your books is the first step to resolving an IRS tax lien. With organized financial records, you can take advantage of all available tax deductions and credits and potentially lower your tax bill.

Further reading: Five Ways to Pay Off IRS Tax Debt

How Bench can help

You don't have to deal with federal tax liens and levies alone. Bench is here to support you every step of the way.

Our team of experienced bookkeepers can get your books caught up fast. We can also file your taxes for you and assist in the tax resolution process by identifying potential tax relief options and feeling you apply for installment agreements or offers in compromise.

By partnering with Bench, you gain access to a dedicated team that understands your business and provides the personalized support you need.

Take control of your financial future

Facing a federal tax lien is stressful, but with the right information and support, you can take control of your financial future. Whether you pay your tax debt in full, set up an installment agreement, or explore other tax relief options, taking action now will help you avoid more severe consequences like a levy.

Don't ignore those IRS letters; take proactive steps to resolve your tax debt and remove the lien, paving the way for a more secure future. Contact Bench to get started, and let us help you achieve peace of mind.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.
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