Life is bad enough when borrowers can't pay off amounts owed to commercial creditors such as banks and other financial institutions. But people can find themselves in hot water if they owe the IRS money.

What could happen? The IRS can establish a legal claim to a person's property, including a house or car, as security for payment of a tax debt. However, an IRS lien can only be filed after the following three steps have occurred:

1. The IRS assesses a tax liability.

2. The IRS notifies the person of the deficiency and sends a demand for payment stipulating the amount owed.

3. The person does not pay the debt within ten days of being notified.

Once these steps have been completed, a lien is created. By filing notice of the lien, the IRS effectively "warns" other creditors about its interest in the person's property. The notice is used by courts to prioritize claims in certain situations. The lien remains a matter of public record until the tax debt is paid off in full.

However a filed notice of tax lien might be withdrawn if:

  • The notice was filed too soon, or not according to IRS procedures.
  • The taxpayer entered into an installment agreement to pay the debt (unless the agreement provides otherwise).
  • The withdrawal will speed up collection of the tax.
  • The withdrawal would be in the taxpayer's best interest (as determined by the IRS Taxpayer Advocate), and in the best interest of the government.

Key point: Despite a common misconception, an IRS lien does not always take precedence over other creditor claims. Under the process known as "subordination," a federal tax lien can be made secondary to another lien. We can advise you regarding the priority of a federal tax lien in your situation.

Lesson to be learned: An IRS lien is a serious matter. Once filed, a person's credit rating is generally harmed. In one report, the U.S. General Accounting Office noted that it is crucial for the IRS to release liens in a timely fashion because:

  • Businesses may be unable to obtain necessary credit because lenders may assume they are bad credit risks.

  • Individuals may miss an opportunity to buy a home or an automobile because they are unable to obtain financing.

  • Individuals may be unable to sell their homes because of the presence of tax liens on their properties.

Call our office if you, or someone close to you, is in this kind of tax trouble.