Tax Lien

 

Definition of Tax Lien

Tax lien refers to imposing a legal claim on a property or any asset of any person being an individual or a business, under the operations of law to recover the taxes due to the government. The tax lien guarantees the revenue department that the proceeds from selling such assets flow to the government first towards the tax dues when the assets under the lien are sold if the person fails to pay the demanded tax payment.

Explanation

If federal or state taxes are unpaid, the respective government can impose a lien on the person’s assets in default to secure the payment of the due taxes. By imposing such a lien, the government doesn’t sell the person’s assets; instead, it ensures that if the person’s assets are sold or transferred in any manner, then the first claim over such assets lies in favor of the government before any other party.

It can be imposed when federal or state taxes are unpaid by a person. If a person has not paid property tax, the government might impose a tax lien on the property. Similarly, it can also be imposed when income taxes are not paid even after the order for outstanding tax demand is issued to the taxpayer. The lien on the assets will continue for as long as the tax dues are outstanding.

How Does it Work?

The government will issue a demand notice to the defaulter stating the amount of tax due from such a defaulter. The information will prescribe a time limit within which the person can pay the amount or contact the department to resolve the issue in case there is any discrepancy in the notice.

If the person fails to either pay the amount or resolve the matter, the concerned government department gets the right to impose a tax lien on the assets of the person under default. The assets may include the taxpayer’s personal assets such as property, vehicles, securities, jewelry, etc. The business assets will be subject to the tax lien if the taxpayer is a business organization. A lien imposed by the federal government will supersede any other party’s claims over the taxpayer’s assets. Any realization made on the assets will first go towards the government. Further, the taxpayer can’t sell or transfer the assets under lien.

When the lien is imposed, the fact of the same appears in the taxpayer’s credit report, affecting the score adversely. The only way by which the lien can be removed is by paying the taxes due along with other charges that may apply.

Example of Tax Lien

Let us take two situations where it can be imposed.

• A property owner is facing a financial crisis and cannot pay dues of property taxes applicable to the property. The local government can impose tax liens on the property where the property tax remains unpaid.
• A taxpayer doesn’t pay income taxes for two consecutive tax years. The IRS sent a demand notice for the recovery of the income taxes. However, the taxpayer didn’t respond to the information as well. The IRS may impose a tax lien for the taxpayer’s assets.

Impact of Tax Lien

The significant impacts of tax liens are discussed below:

• The credit score drops since the tax lien is recorded in the credit reports of the taxpayers. Thus, there can be difficulty in getting credits.
• Even the assets purchased after the tax lien is imposed subject to the tax lien.
• Personal and business assets become subject to lien restrictions, and the same can’t be realized.
• If the person files a bankruptcy petition, it remains in effect, which means that the person will still be responsible for the dues even when adjudicated insolvent.
• When the situation of a tax lien remains unresolved, it may put a person at risk of serious criminal charges.

Advantages

It is an advantageous tool for the federal and state governments due to the following reasons:

• The government gets a guarantee for the realization of tax payments by attaching the taxpayer’s assets.
• Once it is imposed, the taxpayer can’t realize the assets by selling or transferring them.
• It is disclosed in the credit reports of taxpayers and thus, also alerts the lenders about the financial position of the taxpayer.

Disadvantages

The imposition of a tax lien is an adverse situation for the taxpayers due to the following reasons:

• The taxpayer’s credit score deteriorates, due to which the taxpayer faces difficulty in securing credit.
• The taxpayer cannot realize the assets without the consent of the department.
• Even if the person files for bankruptcy, the liability doesn’t get affected.
• Tax liens bring a bad image towards a person, and the person may also face discrimination in jobs.

Conclusion

To avoid tax liens, people must meet their tax liabilities on time. Further, if you receive any tax demand notice, you must not ignore it; otherwise, you might face serious problems. If you have received a message for the tax lien, the only way you can get out of it is by depositing the requisite tax with the applicable interest and penalty with the government.

Recommended Articles

This is a guide to Tax Lien. Here we also discuss the definition and how does tax lien work, along with its advantages and disadvantages. You may also have a look at the following articles to learn more –

1. Income Tax Accounting
2. Deferred Tax
3. Deferred Income Tax
4. Tax Sale