If you receive a Notice of Federal Tax Lien in the mail, do not throw it away. This letter is the IRS’s way of letting you know that they mean business. Here’s how it works:
If you neglect to pay your taxes, the IRS will create a balance due. They will then send you a bill–known as a Notice and Demand for Payment– detailing exactly how much you owe. It will include a final deadline by which they must receive payment.
If, at this point, you still fail to pay your back taxes in time, then the IRS makes your negligence public. They will file a Notice of Federal Tax Lien. This type of lien can negatively impact you in multiple ways:
When the IRS files a federal tax lien again you, they lay claim to all of your assets. If, for instance, you want to sell or refinance your home, you won’t be able to do it until you pay your back taxes. If you continue to refuse to settle your tax debt, the IRS can seize any property you have–your home, your car, your business etc. This process is known as levying.
In addition, the IRS will notify creditors of your tax lien. The lien will appear on your credit report and can lower your chances of getting a loan or mortgage. The lien–and tax debt–will follow you, even if you file bankruptcy.
Not surprisingly, paying off your tax debt will get rid of the lien. The IRS will release your lien within 30 days of receiving payment. However, even after your lien is released, it remains on your credit report as an item that has been paid off. You have the option of requesting that your tax lien be withdrawn from your credit report altogether, which effectively clears it from your financial record.