Unpaid taxes in the previous year are known as back taxes. Taxpayers can have back taxes at the federal, state and/ or local levels. Back taxes usually are a combination of interest and penalties on a regular basis.
The Internal Revenue Service has recently given the charge of collecting unpaid back taxes to a private collection agency. Most taxpayers who are unable to pay their back taxes often negotiate a lesser settlement or compromise with Internal Revenue Service either directly or through a tax attorney. Accumulation of the back taxes and non-payment lead to the building of tax debt or tax lien.
Tax debt is a legal claim by government entity against a noncompliant taxpayer’s assets. It secures the government’s right to levy on your personal property that might include real estate, intellectual property, bank accounts and also physical property like any equipment that is owned by the business.
Tax liens are the last resort to force an individual or business to pay back taxes. To get rid of tax lien, the taxpayer must pay what he owes and get the debt dismissed in bankruptcy court or reach a compromise with the tax authorities. There is a difference between lien and levy. Lien gives the Internal Revenue Service or state agency the authority so that they can make a claim against your business property and assets. Levy, on the other hand, is a different action that allows the government to seize your assets or property to satisfy a tax debt when you fail to pay dues on time.
The Internal Revenue Service will release your lien within a month after you clear your back taxes. Federal and state governments deal with unpaid federal or state income taxes, while local governments deal with unpaid local income or property taxes. The Internal Revenue Service will assess your liability and then issue a Notice and Demand Bill for the collection of tax debt and if you as taxpayer neglect or refuse to fully pay the debt in time. Further, if the taxpayer fails to pay the back taxes, the tax authority can then use tax levy to legally seize the taxpayer’s assets, namely, bank accounts, investment accounts, automobiles and real property in order to collect the debt money. A tax lien is usually shown up as public records on your credit report. Thus, tax liens will have a significant but negative impact on your score.
Discharge of Property: The lien is removed from one of your specific property. The eligibility can be determined by several Internal Revenue Code.
Subordination: It will not remove the lien but will allow the creditors to move ahead of the Internal Revenue Service. Subordination will make it easier for the taxpayer to get a loan or mortgage.
Withdrawal: This option removes the public Notice of Federal Tax Lien. It provides assurance to the taxpayer that Internal Revenue Service will not compete with any other creditors for your property.
Once your tax liability has been satisfied and your lien is released you are in agreement for filing all individual returns, business returns and other information returns for the past 3 years.
Lien will directly affect you as a taxpayer. First and foremost there is a risk of losing all your property and assets if the Internal Revenue Service chooses to trail a levy. Lien will directly get attach to all your assets including property, securities, and vehicles. Once a Notice is issued for you, it will limit your ability to get credit or loan. The lien will also attach to your business property including your accounts receivable. Even if you file for bankruptcy, your tax debt or lien and also the Notice of federal tax will continue after the bankruptcy also.
To avoid federal tax lien you should simply file and pay all your taxes within the given time period. However, if you fail to pay on time, please don’t ignore the official letters or correspondences you get from Internal Revenue Service.
Sometimes there is a possibility that due to the incorrect process of tax collection you can receive a tax lien notice though there is no fault from your side. If you come to know that tax lien has been filed by mistake or there is an error from the tax department, you can appeal to the Internal Revenue Service or your State agency via an administrative hearing. Once the authority determines that the lien does not belong to your business, the lien will be released.