What Is a Tax Lien?

What Is a Tax Lien?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A tax lien is a legal claim made by a government entity against a noncompliant taxpayer’s property. It happens when a taxpayer, either an individual or a business, neglects or fails to pay their taxes. To secure the tax debt, the government can place a lien on the taxpayer’s assets, such as homes, cars, personal belongings, or business assets. This lien guarantees the government gets first claim over these assets over other creditors. In other words, a tax lien can make it difficult for the taxpayer to sell these assets without first clearing the debt. The lien also affects the taxpayer’s credit score, making it difficult to get a loan or credit.

Related Questions

1. How can one remove a tax lien?

To remove a tax lien, the taxpayer must fully pay the tax debt or reach an agreement with the tax authority about repayment. Once the debt is settled, the government will release the lien, typically within 30 days.

2. Can a tax lien affect one’s credit score?

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Yes, a tax lien can seriously affect a person’s credit score. Though tax liens no longer appear on credit reports as of 2018, the effects of previously listed liens may still linger and make it hard for a person to get new credit.

3. What is the difference between a tax lien and a tax levy?

A tax lien is only a claim made on properties to secure tax debts, but it does not take the property away from the owner. On the other hand, a tax levy is an actual seizure of property to settle a tax debt.

4. What happens if I don’t pay my taxes?

If you don’t pay your taxes, the government may impose fines, penalties, and interest on the unpaid amount. If the debt remains unpaid for a long time, the government may place a tax lien on your properties, or in severe cases, seize them.

5. Can I sell my house if there is a tax lien on it?

Yes, but the tax lien will need to be paid off at the time of sale, decreasing the profit. Alternatively, the buyer may agree to take on the lien, but this is generally less attractive to potential buyers.