Q: What is a federal tax lien?

A: A federal tax lien is the government's legal claim to a consumer's or a business's personal and real property (assets) and rights to property as security for payment of back taxes owed. The amount of the lien will include interest and penalties and any additional amount the IRS deems it is owed in back taxes.

The IRS is a very special creditor in this instance. The Lien actually comes into existence well before there is an actual physical filing of the Notice of Federal Tax Lien (NFTL). This is referred to as a "secret" lien or statutory (by operation of law) lien. Once an assessment is made by the IRS (for example you file a return with a balance due) and you receive notification of that assessment and demand for payment and the amount remains unpaid for 10 days, a statutory lien exists.

When the IRS physically files the NFTL (with the county recorder where you reside or do business in), the IRS is simply serving notice to all other creditors of its claim against the property, including property acquired after the lien is filed. The IRS may not collect on the lien, (that action is referred to as a levy) but it can have a devastating economic impact just by its filing. With the lien in place, a consumer cannot sell or transfer the property until the title is cleared by paying the back taxes. Often times the consumer has difficulty renting an apartment, even applying for certain jobs.

As public record, a federal tax lien will show up on a credit report, and it will remain a public record for up to 10 years even if is fully paid off much sooner. If paid off, the credit bureaus generally indicate that the lien was released, but it still shows up on the credit report. With a federal tax lien in place, it is often impossible for a consumer to obtain financing on an automobile or home, get a credit card, or sign for a lease.

The lien can be released once the underlying tax liability has been satisfied in full, and that amount will also include all fees that a jurisdiction will charge to file and release the lien. Most will be released automatically after 10 years unless the IRS re-files for another 10 years.

In rare cases, the IRS will remove a lien that has been placed in error. A Certificate of Discharge of a lien is generally used when selling real property and the IRS normally is paid in full with the sale proceeds. Under certain situations, refinancing of real property may be allowed; a Certificate of Lien Subordination is used in such circumstances.

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