Tax Lien

Definition of Tax Lien

Tax lien refers to the imposing of 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 serves as a guarantee for the revenue department that the proceeds from the sale of such assets flow to the government first towards the tax dues when the assets under 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 assets of the person in default to secure the payment of the taxes due. By imposing such a lien, the government doesn’t sell the asset of the person; instead, ensures that if the assets of the person are sold or transferred in any manner then the first claim over such assets lie in the favor of the government before any other party.

A tax lien can be imposed when federal or state taxes are unpaid by a person. Suppose a person has not paid property tax on the property then the government might impose a tax lien on the property. Similarly, a tax lien 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 notice will prescribe a time limit within which the person can pay the amount or contact the department for resolving the issue in case there is any discrepancy in the notice.

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

When the lien is imposed, the fact of the same appears in the credit report of the taxpayer 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 tax lien can be imposed.

• A property owner is facing a financial crisis and is unable to pay dues of property taxes applicable to the property. The local government can impose a tax lien on the property on which the property tax is remaining unpaid.
• A taxpayer doesn’t pay the 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 notice as well. The IRS may impose tax lien in such a case of the assets belonging to the taxpayer.

Impact of Tax Lien

The main impacts of tax liens are discussed below:

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

Advantages of Tax Lien

A tax lien 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 payment by attaching the assets of the taxpayer.
• Once the tax lien is imposed, the taxpayer can’t realize the assets by selling or otherwise transferring them.
• A tax lien is disclosed in credit reports of taxpayers and thus, also alerts the lenders about the financial position of the taxpayer.

Disadvantages of Tax Lien

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

• The credit score of the taxpayer gets deteriorated due to which the taxpayer faces difficulty in securing credit.
• The taxpayer is unable to 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 bad image towards a person and the person may face discrimination in jobs as well.

Conclusion

To avoid tax liens, people must ensure that they meet their tax liabilities on time. Further, if you receive any tax demand notice, you must not ignore it otherwise you might land in serious problems. If you have received a notice for the tax lien, the only way you will be able to 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 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