Taxpayers with unpaid back taxes that have avoided settling their debt with I.R.S. are prime targets for a Tax Lien. The term “Tax Lien” refers to the I.R.S.’s legal claim on a taxpayer’s property as payment for their debt, and it’s one of the first aggressive steps the I.R.S. takes to collect on back taxes after previous contact has been ignored. If a Tax Lien is also ignored, it will then turn into a Tax Levy.
Before a Tax Lien can be enacted in Illinois, the I.R.S. will contact you regarding your tax liability, usually by mail. Their letter will tell you the amount of money owed to the government, as well as the amount of penalties and interest as a result. If there is no response to this letter, the I.R.S. will send four more letters before they take further action (CP-501, CP-502, CP-503 and CP-504). Each letter is increasingly threatening, with the last one stating the I.R.S.’s intent to enact a Tax Levy. If there is still no response or the back taxes are not paid, the I.R.S. has grounds to assume that they are unable to receive payment in the typical fashion and will file a Notice of Federal Tax Lien (NFTL). By the time you are notified, the lien has already been applied to your property. This gives the I.R.S. legal claim you’re your property and prevents you from selling or borrowing against any of your major assets, Essentially, you lose the rights to your own property. Tax liens are also public records, which means your reputation is also at risk, which can effect your personal life and business.
A Tax Lien wipes out almost any chance of getting credit for other large purchases, such as a vehicle, boat or home. It can also place taxpayers in serious financial duress, as they are no longer able to hold assets in their name. They will also need to find financing from alternate sources, since most loan establishments will not be likely to offer them funding. Every creditor with whom the taxpayer has a loan will be notified, including mortgage companies. Until you have settled your tax debt, I,R.S. Tax Liens will remain on your property as long as the Statute of Limitations still applies (typically 10 years). The I.R.S. holds precedence in any debt repayment, so any money made on the sale of major property automatically goes to them.
If you continue to ignore a Tax Lien, the I.R.S. ultimately seize your assets and sell them, also knows as a Tax Levy. By the time your tax situation comes to this, the I.R.S. has little faith in your ability to repay your back taxes. However, it is highly recommended that taxpayers not allow it to escalate this far. Waiting out the 10-year Statute of Limitations may seem like a viable option after a Tax Lien is placed on assets, but it is likely that you will have a Levy placed on you before the Statute expires. Even if you do not have all the funds to repay your debt, it is highly advisable to approach the I.R.S. first, instead of waiting for them to come to you.
If there is a Tax Lien on your property, consulting a tax professional for guidance is strongly advised. Their expertise will assist you in negotiating with the I.R.S. to have the Lien released so you can reclaim your assets. You may be able to agree on a payment plan or Offer in Compromise, which will enable you to pay your debt without compromising yourself financially. The time to make a decision is now.