Christine* has been living with her grandparents since she was born. When she started working, she got into trouble with the Internal Revenue Service after receiving an audit report that says she owes the federal government a total of $85,000. Unable to pay the liabilities, Christine chose to ignore the issue because she did not want to pay the dues.
Federal Tax Lien
If you find yourself in a similar situation to Christine, here is what could happen to you. The IRS will utilize Internal Revenue Code § 6321 to enforce its collection power, which states that “If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition to that) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.”
Simply put, a tax lien covers the taxes, interest, and penalties you owe and is principally attached to all your properties and rights. For example, since Christine chose to refuse to pay her tax liability, the IRS will pursue all legal properties and assets under her name. So, how exactly is the IRS going to get back at her?
Christine owns no real estate since she lives with her grandparents. The IRS decided to record a Notice of Federal Tax Lien at the recorder’s office in their area and discovered that her grandparents had transferred the house under her name.
This is where the lien attaches now. Christine would not be able to transfer the house title to someone else or even sell it without paying the IRS first. The Notice of Federal Tax Lien is like a public service announcement to the whole world that a person owes something to the IRS. Thus, if you wish to get a loan or get in touch with creditors and lenders, you will have a hard time because they can readily access the public record about your credit report that includes the tax lien.
An important thing to note is this: a tax lien and Notice of Federal Tax Lien are two different things. Essentially, automatic tax liens are secret or not put in public records unless you can get away from it by paying your tax liability, filing for bankruptcy, or completing an Offer in Compromise.
On the other hand, the Notice of Federal Tax Lien is like a tattletale–it lets the general public know of your secret. The only way on how you can take care of the Notice of Federal Tax Lien is through the IRS Certificate of Release of Federal Tax Lien. You can have it by paying the liabilities owed, obtaining the bankruptcy discharge the dues, or paying through an Offer in Compromise.
*The names and circumstances described in this article are fictional and are not based on real people or events.