The IRS could file a tax lien against you if you owe federal back taxes
One of the best reasons to file late taxes is to avoid the sort of penalties the IRS can hand out to those who owe unpaid taxes for a given year and haven’t yet filed a tax return.
One of the nastiest weapons in their arsenal is the tax lien. A tax lien gives the IRS claim to your property as security or payment towards taxes owed. Your property here can mean your paycheck from which the IRS can excise a percentage of your income. Or, in the worst possible case, it can involve seizure of your home to satisfy your debt.
Section 6321 of the Internal Revenue Code states that
If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.
The key words here are after demand: IRS cannot just file tax liens at will. There are procedures that the agency must follow. First they must assess your liability. Then they must send you a Notice and Demand for Payment, essentially a bill that tells you how much you owe in taxes.
You have ten days to pay the taxes owed after the IRS sends this notice. If you fail to pay after those ten days, a tax lien arises automatically.
There is also a debt threshold below which a tax lien cannot be filed. Earlier this year, the IRS increased the threshold for issuing liens from $5,000 to $10,000. Since tax liens often hurt taxpayers, the IRS increased the limit in the hopes it would enable more people to resolve their tax debts.
If a tax lien is issued, it attaches to all of your property and substantially harms your credit rating. You may not be able to get a loan, a new credit card, or a lease.
All of your creditors will also be notified of the tax lien, which means that if you sell your house, car, or other property, the IRS will be the first to get paid.
Once you pay your debt due, including any interest and other additions, or once the IRS accepts a bond guaranteeing your payment of the debt, the agency will issue a Release of the Notice of Federal Tax Lien.
Though the IRS is supposed to file a release within thirty days of the tax debt being paid, it is not uncommon for them to forget to do this. And even if they do, it can take months or years for the release to be picked up by credit reporting agencies. Consequently, it’s not unheard of for people to find tax liens on their credit report years, even a decade, after they were filed.
If, however, you still neglect to pay, the IRS will implement a tax levy, which means they will seize your assets and sell them that at public or private sale in order to satisfy your tax debt. It’s not uncommon these days to hear of homes sold for back taxes.
Having a tax lien filed against you is an extreme step, and thankfully it doesn’t happen to everyone. But if it does, it can have potentially damaging and lasting effects. Take the initiative to file your prior year taxes now to avoid the possibility of a tax lien.
Photo via Tax Credits on Flickr.
2010 I had a neighbor fill my taxes out however it was not (e-filed) it is on tax forms . I felt they were not filled out prperly and never sent them in. Meaning to redo them became very confusing and soon put off. My low income status ( & unemployed ) and new tax season has forced my hand into searching for answers. * Note 2010 taxes shows a refund . I suspect 2011 will prove a refund as well .please help
Hi Vince,
The good news is that it’s not too late to file a 2010 return. And if you are in fact due a refund, as you indicate you are, the IRS will not charge you any penalties for the return being late. But you may not be able to get your 2011 refund if you don’t file 2010 too. Using a service like PriorTax, you can complete both your 2010 and 2011 returns at the same time and get everything squared away with the IRS.
I completed my 2010 taxes (1040 and 2555 forms) recently and was told by the IRS today that they are now accepting past taxes electronically but because this change is so new (as of Jan 2012) many software providers are not yet updated. I’d like to file my 2010 taxes as soon as possible as I am in the middle of closing on a house. I have already completed and submitted my 2011 taxes. Do you have any suggestions on how to expedite the IRS receiving 2010 returns? Some background: I was living/working in the UK and did not realize I still needed to file. I qualify for the foreign earned income exclusion so I do not owe any money. Thank you!
Hi Jess,
Unfortunately, like many of the other software providers, we are not yet prepared to e-file late returns. Unless you can find a provider ready to e-file late taxes, my suggestion would just be to paper file as people have done with late taxes for years. It’s true that paper filing does take longer for the IRS to process, but on your end it shouldn’t take much longer to do. It’s just a matter of printing the return out and mailing it in.
I had a bankruptcy in 2012 and was told my taxes for the previous 3 of federal taxes would not be covered by the bankrupcy. I filed returns but didnt pay on them. I’m a self employed realtor. I have not received any notice from the IRS. Should I be worried about a tax lien? Thank you!
Hi Monda,
You made the right move in filing your returns in the first place. This helps you to avoid the failure-to-file penalty fee from the IRS. You may still be responsible for the failure-to-pay penalty fee. This will cost you 0.5% of your unpaid taxes per month after the due date that the amount is not paid. This will only amount to 25% of your unpaid taxes due. You may want to start paying these amounts back as soon as possible. Keep in mind that the sum does not need to be paid all at once. The IRS offers payment plans to help lessen the burden.