What is a Notice of Federal Tax Lien (NFTL) and Why Does it Matter?
Tax time can be stressful. Most of us just want to file our taxes correctly and move on. But what happens when you owe the IRS and don’t pay? The IRS has several tools to collect unpaid taxes, and one of the most significant is the Notice of Federal Tax Lien (NFTL). Let’s break down what this means and why you should pay attention to it.
What Triggers an NFTL?
First, it’s important to understand that an NFTL is not the first step the IRS takes. It typically happens after other actions. Here’s a typical progression:
- You owe taxes: You filed your tax return (or the IRS filed for you), and it shows that you owe money.
- The IRS sends notices: The IRS sends you letters saying you owe money. They’ll ask for payment within a specified period and may also include penalties and interest.
- You don’t pay: If you don’t respond to these notices and don’t pay the amount owed, the IRS might then file an NFTL.
An NFTL is essentially a public announcement that the IRS has a claim against your property. It’s not a seizure of your property (that’s a different action called a levy), but it allows the IRS to collect money from the sale of your property if you don’t pay your tax debt.
How Does an NFTL Work?
Once the IRS files an NFTL, it becomes a public record. This is key. Here’s how it works:
- Public Record: The NFTL is recorded in the public record office where your property is located (usually your county or state recorder’s office). This makes the lien known to the public.
- Priority: This publicly recorded lien gives the IRS priority claim over your assets. If you sell your property, or if another creditor tries to claim your assets, the IRS is usually first in line to get paid.
- Claim against all property: The lien attaches to all of your property, not just a specific piece. This can include your home, cars, bank accounts, investments, and more.
- Duration: An NFTL stays in place until you pay off your tax debt or until the IRS’s collection statute of limitations expires (generally 10 years from the date the tax is assessed, but extensions are possible).
What are the Impacts of an NFTL?
The impacts of an NFTL can be far-reaching:
- Credit Score: An NFTL will likely appear on your credit report, and it can significantly lower your credit score, making it harder to get loans, credit cards, rent an apartment, or even get certain jobs.
- Property Sales: If you want to sell your property, the IRS has to be paid first from the proceeds. The presence of an NFTL complicates and delays the sale process significantly.
- Financial Transactions: Banks and other financial institutions may see you as higher risk. This can make it harder to open new accounts, take out loans, or make financial transactions.
- Public Record: Anyone can look up and see that you have an NFTL, which can be embarrassing and raise concerns for business partners or clients.
- Future Tax Issues: The IRS can become more aggressive in the future if you have a history of tax debt and tax liens. They might automatically file a lien sooner if you have trouble again.
Who is Affected by an NFTL?
An NFTL can affect anyone who owes federal back taxes. This includes:
- Individuals: People who owe income tax, self-employment tax, or other federal taxes.
- Businesses: Corporations, partnerships, and other businesses that owe payroll taxes or other business taxes.
It’s not just high-income earners either. A tax lien can affect anyone who underpays or fails to pay their taxes, regardless of income level.
How Can You Resolve an NFTL?
Here’s the good news: an NFTL is not permanent. You have options to deal with it:
- Pay Your Taxes: The most straightforward solution is to pay the tax debt in full. Once paid, the IRS will release the lien.
- Payment Plan: If you can’t pay in full, you can set up an installment agreement with the IRS to pay off the debt over time. The NFTL will remain in place until the debt is paid.
- Offer in Compromise (OIC): An OIC allows you to settle your tax debt for less than the full amount. The IRS approves OICs based on your ability to pay, your income, and the value of your assets. If accepted, the lien will be removed.
- Discharge: In very specific circumstances (like a bankruptcy), the tax lien can be discharged and made unenforceable.
- Subordination: If you want to refinance your home, for instance, you could request the IRS to put their lien in a secondary position allowing another loan to take priority.
- Withdrawal: In certain situations, such as an error in the filing, the IRS may withdraw the lien. This is different from a release.
Related Concepts and Terms:
- Tax Levy: This is an action where the IRS seizes your property to pay your debt. An NFTL comes first, then a levy may follow.
- Tax Lien: This is a general term. An NFTL is the specific legal filing for a federal tax lien. State and local governments can also place tax liens.
- IRS Notice: Letters you receive from the IRS stating you owe money, before they file the tax lien.
- Installment Agreement: A payment plan with the IRS for back taxes.
- Offer in Compromise: An agreement with the IRS to settle your taxes for a lesser amount.
Tips and Strategies:
- Be proactive: Don’t ignore IRS notices. Address them immediately to prevent further collection actions, like an NFTL.
- Keep good records: Keep copies of all tax documents, including returns and payments.
- File on time: File your tax return by the deadline, even if you can’t pay what you owe. Late filing can lead to extra penalties and interest.
- Seek professional advice: If you are facing a significant tax debt, consult with a tax professional such as a CPA or tax attorney. They can help you understand your options and navigate the process.
- Negotiate: The IRS is willing to work with taxpayers, so be proactive about requesting a payment plan or offer in compromise if you cannot pay the amount you owe.
Common Mistakes and Misconceptions:
- Ignoring IRS notices: This is one of the worst things you can do. Ignoring the problem will only make it worse.
- Thinking an NFTL means the IRS is taking your stuff right away: The NFTL is a legal claim, not an immediate seizure. A levy is what comes if you don’t resolve your issues.
- Thinking an NFTL goes away on its own: An NFTL will stay on your record until you resolve the underlying tax debt, the statute of limitations is reached, or you negotiate a release or withdrawal.
- Believing that an NFTL is a punishment: It’s not meant to be a punishment, it’s simply a legal way for the government to protect its right to be repaid for the taxes owed.
Dealing with an NFTL can be challenging, but understanding what it is, how it works, and what your options are is the first step to resolving your tax debt and getting your financial life back on track. Remember to always stay proactive and communicate with the IRS to avoid greater consequences.