Learn the difference between a state and federal tax lien and how to stop and remove them from your record. Tax liens aren’t limited to the IRS, state governments can also put a lien on your assets or property if you don’t take care of your tax bill.

A tax lien doesn’t magically appear overnight. It generally takes a few years of not paying to get to that point. If you owe taxes and you don’t try to work it out with the state government or the IRS, a tax lien can be a real possibility.

How a Tax Lien Works

A tax lien is how the government stakes a claim on your assets. If you owe federal or state taxes and you haven’t tried to work out a deal, the government can file a lien on something you own.

For federal taxes, you get a few chances to make it right: three bills are sent before the next step in the process. The process for state tax liens varies by state, but you’ll get a notice. A tax lien should never be a surprise.

The Difference Between Federal and State Tax Liens

If you owe taxes to the state or the IRS, keep in mind that your options to settle federal debt may not be the same when dealing with state tax debt. “Tax liens are very different between the federal government and each individual state,” said Arthur Rosatti, Esq., an attorney with Ashley F. Morgan Law, PC. Federal liens follow the same laws no matter where you live.

But that’s not true for state tax liens.

State tax liens vary by the laws of the state the lien has been placed in.

David Freudenberg

For example, in “Virginia, they have liens that act very much like a federal tax lien, but they also call their Levy and Garnishment actions liens,” added Rosatti. The differences in how to settle a federal vs. state tax lien can be very confusing to taxpayers. So, how do you know what to do?

For the best outcome, contact a tax pro who knows what they’re doing. You don’t want to end up in more hot water because you made the wrong move. Something as simple as using the wrong form or incorrectly filling out a form can make matters worse.

Quick tip: Once you start an installment plan, you will have a harder time qualifying for a debt reduction request later.  We recommend you speak to an expert to see if you qualify for tax relief first.

How Does a Lien Affect You?

Tax liens affect the assets an individual owns and puts them at risk of being seized by the Federal or State government.

David Freudenberg

But there is good news.

Tax liens do not affect credit scores [because] they are no longer reported on credit reports. It rarely affects getting a job if you are upfront with the potential employer unless you are going into the financial industry.

Arthur Rosatti

Still, your real estate, property, and vehicles are put in jeopardy if you’re facing a tax lien. And if you’re a business owner?

A lien can also attach to business property, including your accounts receivable. Don’t think filing bankruptcy will get you out of it. Your tax debt and tax liens can continue even if you file for bankruptcy.

There are options for those who want to have a state or federal tax lien removed.

David Freudenberg

Removing a State Tax Lien

When the state removes a tax lien, the government doesn’t have a legal claim to your property anymore. But there’s a catch. You must pay your tax bill in full, settle the amount, or otherwise take care of your balance before the government releases a lien. Because state tax liens follow state laws, how you do that depends on the state you live in. States can be persistent.

The level of aggression for the collection efforts depends on the state’s laws.

David Freudenberg.

At the very least, you should have gotten a notice about your tax lien from the state, and that notice should have a number to call for more information. Contacting the governmental body that sent you the notice is your best course of action.

There is another option, you could contact a tax debt relief company, an attorney, or a CPA for help if you don’t want to do it alone.

Removing a Federal Tax Lien

Figuring out how to remove a federal lien is much easier than a state tax lien.

That’s because “federal tax liens follow the same laws no matter what state they are placed in,” said Freudenberg. Plus, the IRS has the Fresh Start program to simplify the process.

If you sign up for an extended installment agreement, the IRS will stop tax lien efforts. Your payments should be affordable since you get six years to pay off what you owe. Settling your debt for less than you owe is another option.  The bad news is, getting the IRS to forgive some of your tax debt isn’t easy. Your request can be denied or rejected if you didn’t include the right information or didn’t check the right box.

Offer in Compromise Mistakes:

Tax relief expert (and former IRS revenue officer). Jeffrey McNeal says when he processed offers, he saw tons of mistakes made on the forms, even when prepared by CPAs and enrolled agents!  So be sure to ask an expert for help.

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