A tax lien allows the IRS to make a legal claim against your property if you neglect or fail to pay tax debt. Tax liens are typically reserved for taxpayers who owe above a high threshold and they generally constitute a last resort in the collections process, as the IRS will provide plenty of opportunities to develop a repayment plan beforehand.
You’ll be issued a Notice of Intent to Levy and receive 30 days to settle your debt before the IRS attempts to collect on your assets; if your liability is left unpaid after that time, you may be served with Form 668(Y) that confirms a tax lien has been filed against you.
If back taxes amount to $10,000 or more, the IRS is required to file an automatic Notice of Federal Tax Lien in the taxpayer’s credit file, which shows up as a derogatory mark on credit reports. This action can result in several consequences such as:
Negatively impacting creditworthiness
Making it more difficult to obtain new credit
Freezing existing lines of credit
Increasing interest rates on credit cards
Raising insurance premiums
Complicating the sale of your property
Impeding the ability to buy a home with taxes owed
Note: A tax lien is different from a tax levy, which allows the IRS to collect on debt with actions such as wage garnishment, property seizure, and bank account seizure.
Remember, there are many steps involved in the collections process before it escalates to this level. Let’s look at an example:
You filed a tax return and received an IRS audit that determines you did not pay your tax liability in full. You incur failure-to-pay penalties and fees on top of your outstanding tax bill. Unable to afford repaying the debt, you put this financial obligation off to the side for a while.
Interest compounds and back taxes begin piling up. If you ignore the IRS’s multiple attempts at communication regarding repayment, failure to pay back taxes can automatically trigger a tax lien that appears on your credit file.
Depending on your total liability and repayment efforts, this can severely lower your credit score—and if your score was already weak to begin with, your lenders may freeze open lines of credits or increase interest rates, making it even harder to climb out of debt. Even once the lien is paid off, it can remain in your credit history for up to seven years with lasting financial consequences.
If you find yourself falling down a similar path, it’s critical that you make arrangements with the IRS to prevent this from happening. Contact a Advance Tax Relief professional who can work with you to find a debt settlement solution that fits your needs so that back taxes do not affect your credit score.
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