One of the IRS' most effective methods of motivating taxpayers to pay their taxes, aside from threats of jail, is to threaten to attach tax liens to their property. IRS tax liens are especially far-reaching, because they attach to all the debtor's property. This could include property the debtor has not even acquired yet. The tax lien empowers the IRS to foreclose on the property and use the cash to pay the tax debt.
The Internal Revenue Service, which is part of the United States Department of Treasury, has been around since the 1800s. In the beginning, its goal was to raise money to fund U.S. wars. Several trillions of dollars later, its use of tax dollars expanded beyond war funding to include things such as Social Security and Medicaid. A U.S. citizen's failure to pay taxes can have dire consequences.
Attachment is the process of making the tax lien enforceable against the debtor. For typical secured creditors, attachment generally requires a signed security agreement, the exchange of something valuable and an understanding that the debtor actually owns the property. This is not so with the attachment of IRS tax liens. These attach upon assessment. An assessment generally involves identifying the debtor's name, address and amount of tax debt. Taxpayers may appeal the amount of their tax debt, however, the IRS may still consider the debt assessed if the debtor doesn't post a bond during the appeal.
To make its rights enforceable against other creditors, the IRS must perfect the lien. For the typical secured creditor, this would involve filing certain financial documents. The IRS does not have to file documents to perfect its interest. The IRS does have to file, however, if it wants to claim a priority interest in the debtor's property. This means the IRS gets paid before those who perfected after it perfects. Since multiple parties may obtain liens on the debtor's property, the IRS typically will file its notice of priority tax lien.
If a potential creditor discovers that the IRS has attached a tax lien to your property, it may be reluctant to accept the property as collateral on a new loan. The IRS' priority position means it would get paid first if the property is sold. If the property's value decreases over time, the new lender would potentially receive nothing. Under certain circumstances, the IRS will subordinate itself to subsequent creditors. Subordination basically means allowing the new creditor to cut in front of it in the payment line.