It’s that time of year again — another tax season is coming to a close. Whether you’re waiting until the last minute to get your return in, you’ve already filed your taxes and are waiting on your tax refund or you’re filing for a tax extension, it never hurts to brush up on your tax lingo, especially if you owe or plan to owe the IRS money this year. Although it’s not a situation all taxpayers find themselves in — and, frankly, one a taxpayer shouldn’t want to be in — it’s especially important to understand what happens if you fail to pay the IRS. Keep reading as we detail what a tax lien is, how it can affect your credit and what you can do if you have one.
What is a tax lien?
If you owe back taxes, whether it’s to the federal government or your state government, and fail to pay those taxes, the government is legally allowed to place a lien on your assets. This means that whoever you owe money to — the state or the IRS — has a legal right to seize your assets (including your property, your vehicle, bank account and other financial assets) in the event that you don’t pay what you owe on time or in full. Tax liens affect both individual taxpayers and businesses alike, so if your business owes back taxes, and you fail to pay the amount owed, you could risk losing your business and its assets, as well. It’s important to note that a lien gives the government agency the right to seize your assets to pay for any debts you owe, while a levy, something we’ve briefly talked about before, is the term used to describe the actual act of seizing and selling your assets.
How do I know if I have a tax lien?
Before we dig into how you’ll know if you have a tax lien, it should be stated that we’re detailing the IRS’ tax lien process — the process for state tax liens may be different, depending on the state. Every year when you file your tax return, you either owe money to the government, are entitled to a refund or sometimes you can owe money to one government agency and be issued a refund from another (e.g., you owe money to the IRS, but are issued a state refund). If you owe back taxes to the IRS, you will receive a Notice and Demand for Payment, and if you ignore that and refuse to pay in full or set up a payment plan, you will be issued a Notice of a Federal Tax Lien. If you still aren’t sure whether you have a tax lien out in your name, you can confirm by checking your credit reports, as this is something that is considered public record and thus, will be reflected on your credit reports.
How does a tax lien affect my credit?
A tax lien is one of the worst things to have on your credit because it has a significant negative impact on your credit reports and credit scores. While most negative marks stay on your credit reports for up to seven years, a tax lien is like a bankruptcy or judgment and can remain on your credit reports for up to 10 years, or until the statute of limitations expires (this varies by state). We should note that if you are unable to pay your tax bill and are considering filing for bankruptcy with the hopes of wiping out the lien, know that the tax lien could still remain on your credit reports indefinitely, as this is one of the few items that the Fair Credit Reporting Act does not allow consumers to have removed from their credit reports.
What are my options for dealing with a tax lien?
Those who already have a name will want to contact the IRS immediately to set up a payment arrangement, as the sooner you pay off the amount you owe, the sooner the lien will be removed from your assets and credit reports. If you owe money to the IRS and want to avoid a tax lien altogether, it’s best that you pay your tax bill in full and on time. If you are unable to do so, you can contact the IRS about setting up a payment plan to pay what you owe in smaller payments over time. If, however, the payment plan you’re offered has too much interest and too many fees for you to afford, a credit card offering long 0% intro APR intro period is also an option you may want to consider. Visit our list of the best credit cards for paying taxes to learn more about paying your taxes with a credit card and see the top card options.