Every creditor wants to get paid, and the government is no different. If you owe unpaid taxes to the United States government, it's the job of the Internal Revenue Service to collect them. One common method the IRS uses to do this is an imposition of a tax lien on your property.
IRS Tax Lien
A lien is a legal right or interest in a property. According to the IRS, "[a] federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets." In other words, the IRS has the right to place a lien on pretty much all of your property.
How It Works
The IRS must follow certain steps to perfect its lien on your property. First, it must assess your tax liability. Once it determines how much you owe, it sends you a bill that explains how much you owe, which is called a "Notice and Demand for Payment." If you don't pay the tax owed within the deadline provided by the notice, the IRS files a "Notice of Federal Tax Lien" in the public records to alert creditors and potential purchasers of the property of its lien.
Federal Tax Levy
A federal tax lien is just an interest on property. The Internal Revenue Service doesn't take your property just because it's placed a lien on it -- in fact, it would rather not. Like most creditors, the IRS wants money, not things it has to sell. However, if you don't pay your taxes, it may levy -- collect -- the taxes owed by seizing and selling the property it has placed a lien on. The IRS can seize both real estate and any personal property, such as your house, a car or even furniture.
Effects of a Federal Tax Lien
Tax liens can have very serious consequences. As discussed above, if you don't pay your taxes, to satisfy your tax obligation, the IRS can seize and sell all property it has a lien on. A tax lien also negatively affects your credit score and your ability to obtain credit. If you're a sole proprietor of a business, the IRS can attach a lien on your business assets. Finally, tax liens are generally not dischargeable in bankruptcy, which means you may be stuck with them after bankruptcy unless the taxes are paid during the bankruptcy proceeding.
Shawn M. Grimsley holds a bachelor's degree in political science, master's degree in public administration and a Juris Doctor. He practiced law for 10 years, focusing on general business law, securities law, real estate and civil litigation. Grimsley now serves as a teacher and writer.