How Does a Tax Lien Work?
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What is a Tax Lien?
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A lien is a an encumbrance placed on a piece of property to secure the payment of a debt. A tax lien is such an encumbrance that results from insufficient payment of taxes, whether they be property taxes, federal income taxes or other state taxes. Essentially, what a tax lien does is enable the government to prevent a person from selling or transferring his property until he pays off his taxes; in the event that taxes stay unpaid without any action on behalf of the individual to pay them, the government can issue a tax levy on a property that already has a lien on it, which results in seizure of the property.
Effects of a Tax Lien
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Tax liens most often arise from unpaid property taxes and federal income taxes. In the case of property taxes, tax owed follows the property from one owner to another. Therefore, if a person buys a home without knowing its tax situation, the home may have years of unpaid taxes--which could result in a lien being put on the home, even though the new owner did not know about it or own the property during that time. Real-estate properties, like homes, are the most common form of property that liens are put against, although they can also be made against cars, bank accounts, ships and almost any asset that might make the individual pay off her taxes. A tax lien usually has a detrimental effect on credit, which can further burden a person's ability to recover after a lien is imposed.
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Getting a Lien Released
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If a lien is put on a piece of property, it is in the owner's best interest to get the lien released as quickly as possible. Getting a lien released quickly can indicate to lenders that taxes were left unpaid mistakenly, which may help the individual if he wants to borrow money. The most simple way to get a tax lien released is to pay the necessary taxes in full. The taxpayer may also issue a bond that guarantees the payment of the owed taxes to get a lien released. Liens may also be stalled through appeals if the individual was not properly notified of the owed taxes, the statue of limitations (the time in which the government can legally attempt to collect taxes) had expired, or the lien was made while the person was in bankruptcy. A lien can also be discharged due to sale of the property, under the assumption that some of the money from the sale will go toward paying the taxes owed.
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