It’s almost impossible to escape a state tax lien. They attach themselves to the social security number of a delinquent taxpayer like a barnacle to a ship. They also attach to any owned real property once they are filed with the County Recorder's Office.
Liens can be general or specific in nature. A general lien is enforceable by the holder (FTB, EDD or other state agency with appropriate authority) for all outstanding obligations that exist against the taxpayer/owner of the property.
A specific lien is enforceable for a specific obligation existing against the owner of the property and depends on the possession of a property by the taxpayer.
For example, when an automobile is taken to a repair shop, the mechanic can hold the automobile until the repair bill is satisfied. The expense of repair is the basis of the lien and the possession of the automobile by the mechanic makes the lien effective.
A state tax lien is a general lien, which arises by operation of law (Revenue and Taxation Code Section 19221) and continues in effect for 10 years from the date of its creation. It attaches to all property and rights to property, whether real or personal, belonging to the taxpayer or entity located in California.
The lien attaches to property owned by the taxpayer or entity at the time the lien arises and even to property subsequently acquired by the taxpayer or entity.
Liens and Installment Agreements
The FTB can file lien where the taxpayer and the FTB entered into an installment agreement, but there is still a balance to close or history of non-payment by the taxpayer. The FTB must notify the taxpayer of this possibility when entering into an installment agreement, and must notify the taxpayer prior to filing the lien.
Sufficient time should be allowed by the FTB after the issuance of a lien to allow the taxpayer or entity adequate time to respond before another action is taken.
The lien will be removed upon full payment of tax liability. The IRS also has an option for withdrawal of a lien, which allows other creditors to try to collect any outstanding bills. However, you are still required to pay the taxes.
Risks of Tax Liens
In the case of the California Franchise Tax Board, a lien is generally recorded after a demand for payment has gone unanswered. The FTB will then send a notice of collection action to a delinquent taxpayer 30 days before recording the lien. This notice will contain your tax debt, your rights in contesting the debt, and the deadline for avoiding the collection action.
If your address has changed and you did not notify the FTB directly to change your address, you cannot use this as a defense. Simply mailing the notice to the last known address satisfies due process requirements.
How is a FTB Tax Lien Recorded?
If you do not respond to this notification, the FTB will record a lien with the county recording office in the county of your residence or a county in which you own real or personal property. They will then file a notice of state tax lien with the California Secretary of State.
The Consequences of Not Paying
Like most tax problems, tax liens do not disappear when ignored. Neglecting to pay an active California FTB lien in a timely manner has serious fallout, and may trigger a cascading series of grievous personal, professional and financial issues. Under certain circumstances, you can be held personally responsible for your business tax debt.
- Additional interest, fees and penalties
There are many extra fees which can quickly accrue to substantial amounts, including but not limited to interest, a late filing penalty, a late payment penalty, an estimated tax penalty and a demand to file penalty.
- Damaged credit rating
Credit bureaus regularly check public records for recorded liens, which can have a disastrous impact on your credit score. A tax lien is a matter of public record; credit agencies monitor for tax liens and place notice of the lien on your credit report. A lien is considered a “derogatory” item; it has a great negative effect on your credit.
If the lien is on real property, it will also be recorded as an encumbrance on the property title. You will noy be able to sell the property or use it as collateral for a loan until the lien is released.
With a lien showing on your credit report, your credit score will go down, and the interest rates on any loans you may be eligible for will be significantly higher. In certain cases, you may not be able to apply for a line of credit at all.
Credit card companies, which seem to give credit to almost everyone, may still provide a credit card but at usurious interest rates.
Tax liens impact another form of credit that you may not typically consider. If you are planning to set up cell phone service and finance a new mobile phone through the agreement, you may find yourself shut out. A new mobile account may not be possible, even without the purchase of a new phone.
In fact, any transaction that hinges on your ability to pay future debt can become closed to you with a lien on your record.
A lien could impact your credit score forever if you do not take care of your tax debt and make the proper notifications. Tax liens do not obey the seven-year removal deadline like other derogatory information.
Under the authority of the California Revenue and Taxation Code (R&TC) the FTB may pursue one, some, or all of the following collection actions:
- Seizure of assets and warrants
The FTB can issue warrants to enforce the payment of a lien, including warrants for the seizure and sale of assets that you own or hold an interest in. It is even possible to lose your house. What this literally means, is that the sheriff can show up at your property and take away any and all assets that could be liquidated to satisfy the taxpayer’s debt.
A bank levy allows the FTB to seize any funds in your bank account up to the full amount of your liability and related fees.
- Garnishment of wages
Your employer may receive a notice from the FTB requiring them to continuously withhold up to 25 percent of disposable income owed to you. According to the FTB, your disposable income is your gross income after federal income tax, Social Security, State income tax and state disability have been deducted, but before 401(k) contributions, health benefit deductions, court-ordered assignments for support and voluntary deductions are taken out. Even if you are self-employed, the FTB can still garnish income owed to you for contracted services.
The Getaway Will Likely Sink You
Does it seem like your tax situation is like being a boat surrounded by Navy ships and the captain is calling out to board your vessel? Trying to haul anchor and blast your way out is not my advice. In fact, I’d advise just the opposite.
Barnacles may be unsightly, but your ship can still sail with them. A hole blasted into the side can sink her, however, especially if the tax debt is a large one. I know it’s hard to hear, but you’ve probably been ignoring your tax liability for far too long. California has attached a lien to your property and now it’s time to make terms with it.
Brotman Law is here to help you stay afloat. We are expert negotiators and have years of experience working with our clients and their FTB troubles. Call my office and let’s get down to brass tacks. In time, instead of hiding in the coves, you’ll be setting sail for open waters again.