Everything You Need to Know About Tax Liens, Pt. 1

The tax community is a house somewhat divided over the effectiveness of liens. On the one hand, the government needs to protect their interests in regards to taxes owed them. On the other hand, tax liens are filed against taxpayers with few or no assets to file a lien against.

The government justifies these actions by saying that it is possible a tax debtor could obtain property in the future; however, tax liens have destructive and long-term consequences against taxpayers. They can prevent a taxpayer from:

• Borrowing to buy a house
• Obtaining a car loan
• Financing a small business
• Gaining financial freedom

Liens appear on a taxpayer’s credit report as a public record, limiting employment options or causing termination.

In short, they are a powerful collection tool that can do real damage when utilized by the state.

What Are Tax Liens?

A tax lien is a security interest filed by the state of California against any real or personal property to satisfy a tax debt. Once filed, the lien becomes a matter of public record and prevents the property from being sold or transferred, as long as the lien exists and is not paid in full. If liability is not paid at the time that it becomes "due and payable" and the government has met all federal and state due process requirements, an enforceable state tax lien can be created for the amount of taxes owed.

There are different classifications of liens. A state tax lien is a general lien; it attaches to all property and all rights to property located in California belonging to the taxpayer, real or personal. It is important to note that the lien also attaches to property acquired in the future by the taxpayer. Therefore, anything that the taxpayer acquires in the future will be tarnished by the tax lien, and the government will secure its right in your property until the tax lien is removed.

Liens have far reaching consequences to taxpayers, individuals, and businesses, and have many implications to the taxpayer, both when the lien is filed and potentially decades in the future.

Notification of Liens

The delinquent taxpayer is notified of the placement of a lien, often by letter. The Franchise Tax Board (FTB), Employment Development Department (EDD), and the Board of Equalization (BOE) notify the taxpayer of a liability and request payment of the delinquent tax. If the taxpayer’s response is insufficient or no resolution is implemented, a lien is placed against the taxpayer’s property to protect the state’s interest.

Further collection action is delayed after a lien filing; the state prefers to give the taxpayer sufficient time to respond or make payment arrangements. However, after that time has been granted, a lien becomes the first step in a series of increasingly more aggressive collection actions.

Liens are usually accompanied by another demand-for-payment letter. Failure to pay the debt or implement a resolution leads to levies, wage garnishments, asset seizures, and, possibly, referral to a field agent to pursue the taxpayer locally.

In short, the lien is one of the first steps in the collections process, but by no means is it the only step in the process. A lien filing is usually a signal of more to come, and the filing of a lien is usually the first action after the taxpayer has been given sufficient time to respond to the account. Once that time has been granted, the taxpayer's account will be transferred to an involuntary collections unit or assigned to an individual agent to extract payment from the taxpayer.

Ignoring the issue does not mean it will go away. Fortunately, many taxpayers can resolve the situation after a lien has been filed with minimal effort. The level of difficulty increases as the collections process advances; resolving the account becomes much more difficult and time-consuming.

Requirements of a Valid Lien

By state law, a properly filed tax lien must contain the following information to be considered valid:

• Last name, first name, and middle initial, or entity name
• Name of state tax agency giving notice of the lien (Franchise Tax Board, Employment Development Department, Board of Equalization, etc.).
• Amount of unpaid tax
• Statement that a lien on all real or personal property and rights to such property has been filed in amount of  unpaid tax,  including all property acquired in future and all taxpayer rights to property
• Statement that state tax agency has complied with all provisions of the applicable law for determining and assessing tax

If you have a question regarding the validity of your lien or whether due process was satisfied, contact an experienced tax attorney for assistance.

How Long Are Liens Valid For?

Notices of State Tax Liens are valid ten (10) years from the date of recording unless the State of California files an Extended Notice of State Tax Lien as an extension of the original lien.  Liens are extended on a case by case basis and only if all of the guidelines for extension are met. There are too many factors  the state considers to list individually, but the underlying the rationale behind extensions that the lien will be an effective collection tool because of some reasonable expectation that the lien will be satisfied, either through the taxpayer’s current ability to pay or because property is expected to be acquired in the future.

As you can see, having a lien filed against your property because you did not pay your taxes can impact more than your current bank account. The problems can reduce or nullify your ability to take out a loan, or become or remain employed. The tax community may not completely agree that a lien is an effective tool for tax collection but that has not stopped the state of California from relying on it.

The next post will go into the details surrounding the consequences of a lien and more about how liens can be filed or withdrawn.  There will also be a brief section about errors in filing liens.