A lien is method by which a lender is able to secure, restrict the use of, or encumber property if debts owed are not paid in a timely fashion. A tax lien tends to refer to the government’s right that gives rights to a lender to encumber property when taxes owed are not paid. There is a slightly difference between it and a tax levy, where the government seizes property and can sell it to pay back taxes.
Tax lien in connection with unpaid taxes on property
Though you may often have heard about a tax lien in connection with unpaid taxes on property, a lien can also be used by organizations like the US Internal Revenue Service (IRS) as the beginning process in collecting unpaid income taxes, as can most state tax boards. Essentially against any “present or future property” including income you make the lien can exist . Most often though, a tax lien in connection with income tax results only in that case when there is a seizure of income via garnishment of future wages.
How Tax lien actually works?
When people are not able to pay needed taxes on property, then they essentially grant the right for a state or federal government to seize that property, especially in the US.
Under tax laws in different countries, a lien may only mean that a government has the right to hold the property until a person pay all the taxes, or most hold the property for a specific period of time before they sell it, so that the person that own taxes has an opportunity to make money so that they pay those taxes. It’s important to note that if selling the property doesn’t result in full payment of the tax lien, then the government has the right to seize other property not associated with the item for which taxes are unpaid, or they may resort to things like seizure of assets and wage garnishment.
Check for Tax Lien before buying a property
When you buy a property, it’s important to find out if the property has any tax liens against it. As a new owner, you may be responsible for meeting these unpaid taxes. If you want to purchase a property then you may require the assistance of a good real estate agent or accountant so that you can make sure that you satisfy any tax liens existing against the property.
What if a person owes money to several creditors or several state agencies?
If a person owes money to several creditors or several state agencies, then about that law is not always clear on whether back taxes are the first things a person must pay. Something called “perfecting” a tax lien is done by the organizations like the IRS , in order to establish priority over other creditors, though this doesn’t always work. By filing a Notice of Federal Tax Lien (NFTL) with local or state governments perfects the lien. In perfecting a lien the IRS has a strong interest so they can be among the first paid through seizure or sale of property.
Do they effect Credit?
Tax liens do affect credit, and failure to pay them can result in taking your credit score to a serious lower levels. When all taxes are paid by you then liens are “released,” and they cannot further affect your credit.
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