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What is a tax lien and what can you do about it?

Imagine that you rack up some debt with a creditor, and as time goes by your creditor expects to be paid back. But after you fail to pay, the creditor grows tired of waiting and informs you that you must comply with the loan agreement. You still refuse to pay.

Now, in this situation, it seems logical for the creditor to have a legal tool to make the debtor comply with the loan agreement, right? This is what a lien is. It is a legal claim that allows the creditor to force the debtor to pay back what he or she owes. How does it "force" the debtor to do this? Well, someone under a lien will have little ability to secure new lines of credit; it makes it impossible to sell an asset that is under a lien; and other entities and parties will know that you are under lien.

Liens are used in the tax world quite a bit as well. The IRS will file liens against people who owe back taxes in an effort to make them comply with the agency. But remember: they have to follow a legal process in order to apply a tax lien. There are ways that you, the taxpayer, can combat this.

One way to combat a tax lien is to request a discharge of property if the lien is applied towards your property. This would allow you to sell the property without the lien preventing the sale.

Another way to combat a tax lien is to "subordinate" the lien. If approved, this would mean that your IRS debt -- which would take precedent over any other debt you are carrying if a lien is in place -- does not have to paid first.

Last but not least, you can appeal the lien and try to have it withdrawn.

Source: FindLaw, "What Is a Tax Lien?," Accessed Nov. 23, 2016

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