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The ABCs of tax liens, part 1: the negative effects of a lien

If you have tax debt, the IRS may use a tax lien as a key tool in its collection process. A lien does not actually take your property; a levy, not a lien, does that. But a tax lien can still have many negative effects.

In part one of this two-part post, we will discuss those effects. In part two, we will discuss steps you can take to avoid a tax lien or get it removed.

The negative effects of a tax lien can be summarized with the simple letters ABC.

A is for assets

A tax lien is the government's assertion of a claim against your assets to satisfy tax debt.

The claim applies to all types of property, including real estate and motor vehicles. It even applies to assets that you acquire in the future while the lien is in place.

The formal step that the government takes to assert this claim is called a notice of federal tax lien (NFTL).

B is for business or for bankruptcy

As we noted a moment ago, a federal tax lien applies to all types of assets. This is also true of business assets. A tax lien can even attach to accounts receivable.

Once a NTFL is filed, it makes the government a secured creditor in the event that the debtor files bankruptcy. This means that the lien continues even after a bankruptcy filing.

C is for credit

A tax lien is a significant hit on a taxpayer's credit. If you are in this situation, it does not only impact your ability to get credit. It can also affect your ability to get a new job because many employers now do credit checks on job candidates before making a job offer.

The negative impact that a tax lien can have on job search is especially acute in particular industries, such as financial services. But employers in many other industries do credit checks on job applicants as well.

Noting the negatives

In short, a tax lien has a lot of negatives. It affects your ability to sell your property and limits the effectiveness of bankruptcy relief. It also hurts your ability to get credit and - through prospective employer credit checks - can even harm your chances of getting a new job.

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