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Federal Tax Lien Statute of Limitations 101

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With tax season upon us, it’s time to start digging into your 2020 tax year. Planning on doing your taxes yourself? Make sure that you cross your t’s and dot your i’s. If you’ve accidentally left some unpaid taxes on the table, you might find yourself with a tax lien.

Tax liens are basically a type of demand for payment. Like other financial penalties, liens can be stressful and complicated. Learning about liens, including the federal tax lien statute of limitations, can help you resolve IRS-related financial challenges. If you have a tax lien, consider getting professional help to navigate what actions you need to take.

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    What is a Tax Lien?

    Tax liens are effectively claims on your property—your house, expensive personal items and other valuable financial assets—made by the government. If you can’t pay the taxes you owe, the IRS applies a lien to your property to ensure that you satisfy your tax obligations.

    Lien notices make people panic, but they’re not the same as seizure notices. The IRS won’t take your house, for example, immediately after filing a lien. A lien simply gives the IRS the first slice of pie when you sell your property. That means your creditors—and you—come later in line if you make a profit or have equity in your asset at the time of sale.

    When and Why Does the IRS File a Tax Lien?

    Tax liens aren’t the first step in the IRS debt collection process. Before filing a Notice of Federal Tax Lien, the IRS will contact you and ask you to pay your tax bill. That’s called a Notice and Demand for Payment. If you don’t pay taxes due within a specific time frame after receiving a Notice and Demand for Payment, the IRS will send you a Final Notice of Intent to Levy and a Notice to Your Right to a Hearing.

    What is a Tax Levy?

    If you don’t make arrangements to pay off your tax lien, the IRS could move forward with a tax levy. A lien is a claim against your property; a levy is an actual seizureof property. It’s very important to make lien payment arrangements before you reach the levy stage to avoid losing your home or possessions. 

    State vs. Federal Tax Liens

    States can file liens as well, so if you owe state taxes, property taxes or have other delinquent taxes, seek advice. Lien policy varies by state and so do state lien statute of limitations. You can check details for your own state on the Federation of Tax Administrators website or on your state website. 

    How Long Is a Federal Tax Lien Valid?

    You might have heard that the IRS forgives a tax debt after 10 years. This is partially true. The 10-year time period people refer to is the IRS statute of limitations (or state statute of limitations), which is the amount of time that the IRS has to collect a debt from you. 

    There’s a snag, though. Every time you take an action related to your tax debt—filing for bankruptcy, for instance—the IRS hits the pause button on its statute of limitations. Let’s use bankruptcy as an example. When you file for bankruptcy, the court you file with might issue an automatic stay on anything related to your finances—including your IRS lien or levy. After the stay is over, the 10-year statute of limitations period continues.

    When Does the Statute of Limitations Time Period Begin?

    The statute of limitations for federal tax debt begins when the IRS officially decides you owe them money—in other words, when the tax debt is assessed. You’ll find this date at the top of your original tax bill.

    If you file for a payment plan or a tax relief plan, the statute of limitations pauses while the IRS considers your application. Installment payment plans also sometimes extend the 10-year statute of limitations.

    What Happens When a Federal Tax Lien Expires?

    To extend a lien, the IRS has to file a lien extension a minimum of 30 days before the end of the 10-year statute of limitations. The IRS might refile a lien for another set period of time if you agree to a repayment plan, for example. If the IRS doesn’t refile the lien in a timely manner, it will expire at the end of the initial 10-year statute of limitations period.

    Tax Lien Collection and COVID-19

    Last year, the IRS temporarily allowed taxpayers to suspend their lien payments until after the tax filing deadline, which was July 20th, 2020. After that date, lien recipients had to continue paying their liens. It isn’t clear if the IRS will introduce a similar measure in 2021.

    Tax Liens and Credit Scores

    Tax liens and tax levies are no longer public record. Thanks to a joint credit reporting bureau decision made in 2018, they won’t go on your credit report, either. Before 2018, tax liens and levies did appear on credit reports, but too many of them were misreported, which led to widespread consumer dissatisfaction and a disproportionate need for credit repair.

    With that said, other types of delinquent debt—including unpaid property taxes—can put your mortgage at risk. If you have any type of unpaid debt, consider speaking to a tax attorney before you find yourself in hot water.

    What’s a Tax Sale?

    Let’s revisit the property tax scenario we mentioned earlier. If you have unpaid property tax debt, your state could try to force the sale of your home to recover that debt. When this happens, a “tax sale” takes place, and your state or local authority lien is satisfied with the proceeds of your home sale. The IRS doesn’t use this option very often—but it is entitled to do so under the law.

    Settling a Tax Debt

    If possible, try to settle your tax debt before your lien turns into a levy. After you pay your tax debt, the IRS has 30 calendar days to release your lien. Occasionally, paperwork gets overlooked and liens aren’t released on schedule—so keep an eye on your lien status to make sure things go to plan.

    What if the IRS Doesn’t Release the Lien?

    If the IRS doesn’t release your lien, call the Lien Desk on 1-800-913-6050 right away. Alternatively, you can fax a letter to 1-855-390-3530. Make sure you have your payment documentation on hand and ask to speak to a rep about lien release. You can seek help from a tax attorney if you run into trouble.

    Tackling Liens Head On

    You can check your credit for old tax liens—and, if applicable, gather evidence for their removal—by retrieving your free credit report card. Products like ExtraCredit can help you monitor your credit in real time so that you can challenge any erroneous entries as soon as they appear.

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