A tax lien is a claim by a governmental taxing authority against your assets. This is usually a last resort to get the taxpayer to pay what they owe.

What Is a Tax Lien?

A tax lien can be used by the IRS in the event that you don't pay some or all of the tax that you owe. They place a claim in your assets, such as your home, as security for their debt. The tax lien doesn't force you to sell the assets, but when you do, the IRS gets their money before you realize anything from the sale proceeds.

State taxing authorities can place a tax lien for unpaid state income taxes, local governments can place a lien for unpaid property or other local taxes.

A tax lien is a matter of public record meaning that it will affect your credit report and could show up in a background check when applying for a new job. In some states and municipalities notices of tax liens are published in the newspaper.

The IRS can also send a notice of their intent to levy. This gives them the right to seize your property or assets like cash in a bank account to satisfy the tax debt.

How a Tax Lien Affects You

As mentioned above, a tax lien is a matter of public record and can impact you in several ways.

Your Credit

A tax lien will be a negative mark on your credit score, this could impact your ability to obtain credit such as a new credit card or an auto loan. This will have a negative impact if and when you try to obtain a mortgage to buy a home. Even if you can obtain credit, the presence of a tax lien will likely result in a higher interest rate.

Property Transactions

A tax lien on your home is considered an encumbrance on the title and could make selling the home more difficult. When a buyer seeks a mortgage, or even if they are buying for cash, a title search will be conducted. A lien on the property generally needs to be resolved so the new buyer has a clean title. A tax lien could derail the potential sale if unresolved.

Finding a Job

A tax lien is a matter of public record and will usually show up in a background check related to employment. Your prospective employer may see this as a disqualifying issue, especially if the position is in the financial area.

How to Find Out if You Have a Tax Lien 

Tax liens are not issued out of the blue. This is generally a last resort in an attempt by the IRS to collect a tax debt. You will receive a written notice that the lien has been filed and all of the details surrounding that lien.

State and local taxing authorities must also provide notice before filing a tax lien on your house or other assets, though the notice procedures and requirements may vary widely.

As mentioned above, tax liens show up when a title search of your property is done in connection with a potential sale. All types of liens can show up, such as a lien placed by a contractor who wasn't paid for doing work on your home.

If you are unsure as to whether there is an IRS tax lien on your home or other assets, the IRS has a hotline you can call. In the case of a lien from a state or local governmental entity you will want to contact them if in doubt.

How to Remove a Tax Lien 

There are a number of ways to remove a tax lien.

  • Pay the amount of tax owed. This is not as simplistic as it sounds as you will want to confirm what the full amount due is. In the case of the IRS, tax amounts owed accrue interest which can add to the amount due.
  • If you can't pay the full amount owed, try to negotiate a settlement with the IRS or local taxing authority. You will usually want to retain the services of an attorney or tax professional experienced in helping clients resolve these types of situations.
  • The IRS might withdraw their lien in order to allow you to sell the property or to refinance it. They will do this if it is in their best interest in that this allows you to pay off the debt. Even if this is done, you still owe the money.
  • Even if you have paid off the tax debt in full, it pays to check to see if the lien on your property or other assets has been removed. There can be a delay in this happening or perhaps the IRS or state taxing authority had some sort of administrative issue. In any event you will want to check your credit history and with the entity that records liens on property in your city or town to ensure the lien has been removed. If not, you will need to contact the IRS or the local taxing authority to ensure this is done.

A tax lien is a serious issue and can impact you in a number of ways. If the IRS or some other taxing authority places a lien on you home or other assets, don't ignore it, do what you can to get this situation resolved as quickly as possible.

It's never too late - or too early - to plan and invest for the retirement you deserve. Get more information and a free trial subscription to TheStreet's Retirement Daily to learn more about saving for and living in retirement. Got questions about money, retirement and/or investments? We've got answers.