When the IRS Will Use a Tax Lien on a Taxpayer

The IRS can use a lien against the property of any individual taxpayer who fails to pay taxes he or she owes to the IRS. The lien gives the government an interest in the taxpayer’s property to ensure that the government receives the amount of taxes that the taxpayer owes but has not yet paid.

How an IRS Lien Works

If a taxpayer, after filing a return, owes money to the IRS, the IRS will send a Notice and Demand for payment of this. The IRS will typically send at least two such letters. If the taxpayer fails to pay the amount demanded, the IRS may begin a collection action against the taxpayer. A lien against the taxpayer’s property is one type of collection action.

To impose a lien, the IRS files a "Notice of Federal Tax Lien" to put creditors on notice that the government has a legal right to the taxpayer's property. A lien can "attach" to (meaning, give the government an interest in) any of the taxpayer’s assets, including real estate, personal property, vehicles, bank accounts, and securities. It also attaches to the taxpayer’s business property, including accounts receivable.

An IRS lien is a public record. When the IRS files a lien, it becomes a creditor of the highest priority, meaning that it is paid first when the taxpayer’s assets are sold. Consequently, the lien will almost certainly affect the taxpayer’s credit. If the taxpayer files for bankruptcy, the lien may continue after the bankruptcy.

The lien typically stays in place for as long as long as the IRS can enforce an action against the taxpayer (usually 10 years) or until the taxpayer pays the tax debt or settles it with the IRS. If a taxpayer pays the tax debt after an IRS lien attaches, the IRS will release the lien within 30 days.

In some cases, the IRS can mitigate the effect of a lien. The IRS, if it chooses, can discharge property; that is, it can remove the lien from specific assets. Alternatively, the IRS can subordinate the lien, which keeps the lien in place but allows other creditors of the taxpayer to move ahead of the IRS in the order of priority. As a third alternative, the IRS can withdraw the lien, in which case the taxpayer is still liable for the tax debt but the Notice of Federal Tax Lien is removed and the IRS no longer has an interest in the taxpayer’s property.

How Levy Differs from a Lien

A lien does not mean that the government has seized the taxpayer’s property. However, if the taxpayer continues to do nothing about the tax debt and the lien, the IRS may eventually seize the taxpayer’s assets and use them to satisfy the tax debt. The government’s seizure of property to cover a tax debt is called a levy.