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Tax Lien FAQs: Federal Statute of Limitations & More

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NOTE: Due to the COVID-19 coronavirus pandemic, the IRS has extended the federal tax filing and payment deadline to July 15, 2020. The recent relief package passed by Congress may have additional tax implications. Please contact a tax adviser for information you may need to complete your taxes this year. Learn more.

If you’ve found yourself unable to pay the taxes you owe, you may have to deal with a tax lien at some point. Like any financial penalties or demand for payment that come from the Internal Revenue Service, tax liens can be scary. But knowledge is power. Every taxpayer should take some time to find out important tax facts, such as how long the federal tax lien statute of limitations is.

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    What Is a Tax Lien?

    A tax lien is essentially the government putting a claim on your property—including any real estate, personal property and other financial assets—when you fail to pay taxes owed. This doesn’t mean your property will be seized. It just means the taxing entity gets first right to your assets over other creditors and yourself. For example, if you sell a property that has a tax lien on it, the IRS gets first dibs on the profits.

    When Does the IRS File a Tax Lien?

    According to the IRS, it can file a Notice of Federal Tax Lien when a business or person fails to pay taxes after receiving a Notice and Demand for Payment. Tax liens are a standard part of the IRS debt collection process. You will receive a notice and a demand for payment from the Internal Revenue Service. If you do not pay or make arrangements to pay after a lien has been placed, you may receive a Final Notice of Intent to Levy and a Notice to Your Right to a Hearing.

    What Is a Tax Levy?

    While a lien is a legal claim against your property, a levy is the actual seizure of that property to satisfy a tax debt. If you do not make appropriate arrangements when a lien is placed on your property, you may be subject to a tax levy. Levies are not public record, are not reported to the credit bureaus and will not affect your credit score.

    Are State and Federal Tax Liens the Same Thing?

    Both federal and state taxing authorities can place a lien on your assets, either for unpaid property taxes, unpaid income taxes or other delinquent taxes. When and how a state will issue a tax lien depends on each state’s policies, though. Tax lien statutes of limitations also vary by state. To find your state’s policies, check the website of your state tax commission or department of revenue.

    What Is a Statute of Limitations?

    A statute of limitations is the legal length of time an entity has to collect a debt. It’s a different amount of time for various types of debts, and each state has laws about certain debts that define unique statutes of limitations.

    What Is the Federal Tax Lien Statute of Limitations?

    In most cases, the federal statute of limitations runs for 10 years. However, the clock doesn’t run on this statute of limitations during certain periods of time. If you file for bankruptcy and the court issues an automatic stay, for example, the IRS isn’t allowed to try to collect debt associated with the bankruptcy. During that time, the statute of limitations is on pause.

    The IRS’s own internal processes can also pause the statute of limitations. If you file for any type of tax relief or payment plan, the clock is paused while the IRS processes and considers your request. These potential pauses on the statute of limitations clock mean the IRS could pursue the debt longer than 10 years if you don’t end up satisfying it.

    You may also voluntarily extend the limitations period. If you agree to an installment payment plan, you may be asked to sign an agreement waiving the federal tax lien statute of limitations period. Discuss this option with a tax attorney before agreeing to such an extension.

    When Does the Time Period Under the Statute of Limitations Start?

    The tax lien statute of limitations starts when the tax debt is assessed. Typically, that’s the date the Internal Revenue Service sends you the tax bill for the debt in question. Note that it’s not the date you receive the bill.

    Do Tax Liens Affect Your Credit Score?

    Starting in 2018, tax liens are no longer listed on credit reports. This is due to a decision and agreement on behalf of the credit reporting bureaus. The bureaus made this decision because so many liens were being misreported, causing credit report errors and extensive need for credit repair.

    However, taxes can have other effects on your credit score. The government can also initiate wage garnishment if you fail to pay your taxes, which could affect your ability to pay any other debt.

    Do Federal Tax Liens Have Priority Over Mortgages?

    An IRS lien doesn’t have priority over your mortgage, but it can delay or block the sale of property in some cases. Mostly, though, the tax lien puts the IRS first in line for any profits related to the sale of your property.

    Other taxes, however, may have different impacts to your mortgage. In some cases, not paying your property taxes may endanger your ownership, for example.

    What Is a Tax Sale?

    If you do not pay your property taxes and a tax lien is placed on your home, the taxing authority has the right to try to recoup the amount you owe by seizing your home and selling it. This is known as a tax sale, and all states have laws that allow local government entities to sell your home through the tax lien process to collect your delinquent taxes. According to NOLO, it’s rare for the IRS to force the sale of a home to recovery tax debt.

    What Happens After You Pay or Settle a Tax Debt?

    The IRS has 30 days to release a tax lien once the debt is paid off, according to Internal Revenue Code 6325. But paperwork often gets overlooked, and tax liens often stick around past their metaphorical expiration dates.

    What Should You Do If the IRS Doesn’t Release the Lien After You Pay?

    Contact the Lien Desk by phone at 1-800-913-6050 or by fax at 1-859-669-3805. Ask for assistance in getting a tax lien released and state that you have documentation showing that you have settled the debt. If necessary, work with a tax professional to help you remove a tax lien.

    How Can You Protect Your Credit from Tax Debt Issues?

    Because tax liens no longer show up credit reports, they shouldn’t impact your credit score. But if you want to check your credit for old tax liens, you can get a free copy of your report at Credit.com.

    Remember that your tax situation could have other negative impacts on your credit score. While you’re dealing with a lien or paying down tax debt, don’t forget the importance of managing your other finances properly. Sign up for a free Credit Report Card to find out exactly where your credit score might be suffering so you can take intelligent, proactive action to fix it.

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