Both the U.S. Government and the State of California take the collection of taxes very seriously. Both the Feds and the State have a number of ways to force non-compliant taxpayers to pay the government the money that they owe.
One of the most common of these is a tax lien. A tax lien cannot only affect property and assets, it used to have a negative effect on your credit score which made it more difficult to obtain credit. That is, up until April 16, 2018, as all three credit bureau’s (Experian, Transunion and Equifax) started removing tax liens from consumer credit reports on that date.
In California, all income and franchise taxes are administered by the California Franchise Tax Board (FTB). While the FTB follows the Revenue and Taxation Code in the State of California, it will often piggyback on audit findings of the IRS. So, if you have been audited by the IRS, you may find the FTB using the information discovered by the IRS as the basis for claiming that you owe the FTB additional taxes.
If these taxes are not paid, or if your income or franchise taxes are overdue, the FTB will often place a lien on property that you own. Let’s take a closer look at what this means and the impact it may have.
What Is A Tax Lien?
In simple terms, a tax lien is a way to get you to pay your overdue tax obligations. While the lien exists, the value of your property protects the government’s interest in your tax debt.
Often a lien is confused with a levy. They are, in fact, two different things. A lien is a legal document that prevents you from selling your property until the lien amount is satisfied and the lien is removed. A levy is the seizure of your property for the purpose of selling it and using all or a portion of the proceeds to satisfy your tax debt, plus any fees and penalties that may have accrued.
Often, the IRS will record a lien when a tax debt exceeds $10,000. The lien informs other creditors that the federal government is claiming your property to satisfy overdue taxes. The lien is removed once the tax liability has been paid.
The FTB will resort to using a lien after a demand for payment has been made on a taxpayer and ignored. Usually, this demand for payment is sent 30 days before a lien is recorded. The demand typically contains the amount of taxes owed, a statement of your rights if you wish to contest this amount, and a deadline for payment.
To Get a Copy of the Tax Lien or Its Release
A tax lien is filed with the County Recorder in the county in which the property is located so contact the county where the lien was recorded or released.
- Contra Costa
- Del Norte
- El Dorado
- Los Angeles
- San Benito
- San Bernardino
- San Diego
- San Francisco
- San Joaquin
- San Luis Obispo
- San Mateo
- Santa Barbara
- Santa Clara
- Santa Cruz
The Effect of a Tax Lien on Your Credit
Because it is a public record, the three credit agencies used to note the lien on your credit report and it would invariably have a negative impact on your credit. So, in the past (prior to April 18, 2018) your credit score would go down by as much as 30 points making interest rates on auto and home loans more expensive. If your credit score fell too far enough, you were sometimes denied credit altogether. Some people found it difficult to even qualify for basic and necessary items, such as a cell phone.
But, as a result of the Consumer Financial Protection Bureau Study which required that public records data be refreshed every 90 days, the credit bureaus were forced to exclude tax liens from credit reports. That effort began on April 16, 2018, so anyone who has a tax lien on their property should check to see if their credit scores have increased. If not, you may want to contact the credit agencies to find out why not.
Lastly, do not forget that a tax lien is considered an encumbrance on your title to the property. You will not be able to sell the property until the lien is removed.
How Long Will The Effects of a Lien Last?
The short answer is potentially forever. If you do not pay your tax debt, the lien will remain as a matter of record. Tax liens are not subject to the usual seven-year collection rule for other unfavorable credit records. In fact, even if you claim bankruptcy, the lien will survive.
The only way to remove the lien is to pay the debt in full. It then takes the IRS about 30 days to get the lien released; but the FTB can accomplish a release much faster. However, even when the lien is released, you should notify the three major credit reporting agencies of that fact just in case they have not eliminated the tax lien from your credit report.
How Can I Avoid a Tax Lien?
The easiest way to avoid a tax lien is by paying your taxes on time and in full. Absent that, you should as much as you can can towards the tax debt.
Trying to avoid the FTB and your overdue taxes will only result in a lien. If you owe taxes, contact the FTB, tell them the situation and work with them to get your taxes paid. Demonstrating your willingness to pay down your tax debt can go a long way to avoiding a lien. For example, you could try and negotiate an Offer in Compromise (OIC). This is an agreement with the FTB that you will pay a lower amount in exchange for the tax debt being satisfied. An OIC is available to taxpayers without the income, assets or means to pay their tax liability now or in the foreseeable future.
Another option would be to set up an installment plan. In this case, you would pay a specified amount of money each month that will go towards eliminating the tax liability. However, interest would continue to accrue during this time. An installment plan cannot exceed 60 months (five years) so keep that in mind.
Consider Hiring a California Tax Attorney or Tax Professional
Tax laws are complicated, and the tax authorities aggressively pursue outstanding tax debts. As can be seen, both the IRS and FTB have the tools necessary to motivate taxpayers into tax compliance. If you’re feeling pressure from either taxing authority, i.e., the IRS or FTB, regarding a tax matter, an experienced tax professional or tax attorney is a necessity. We can make sure any tax assessment is valid; and, if it is, guide you through the repayment process, using our knowledge of federal and California tax law to help you protect your credit rating and obtaining the release of a lien as fast as possible. Contact us today for a free initial consultation.