As if taxes were not complicated and frightening enough, the federal and state taxing authorities have a variety of devices in their arsenal to compel payment and stave off penalties.
Tax liens, one of the most common of those devices, can cause trouble not just with your property and bank accounts, but with your credit score and ability to obtain lines of credit.
Before digging into the impact a tax lien can have on your credit score, here is a brief overview of the California Franchise Tax Board, also known as the FTB.
The Franchise Tax Board is responsible for administering personal and corporate income taxes in the state of California. It is also responsible for many other non-tax functions, such as child support payments. Most of the time, the FTB follows rules similar to the IRS and the federal internal revenue code.
For example, if you pay quarterly taxes, the FTB and the IRS may have the same or similar due dates. However, that is not a given. If an audit is required, the FTB will often use the results from an IRS audit as the basis for its own, decreasing the number of employees needed to perform auditing.
If taxes are not paid in full and on time, the FTB can put a lien in place to block the sale of any property that may be needed in the future to fund unpaid tax debts.
A tax lien is filed in an effort to force you to pay your outstanding tax obligations. You might think of it as your property and bank accounts being held hostage. Liens exist to protect the government’s right to claim your personal property in the event you do not pay your taxes.
A lien is not a levy. A lien is a notice that your personal property and bank accounts may not be sold or cashed out until the lien is removed. A levy is the actual seizure of bank accounts and sale of property up to the full amount of your tax liability and any related fees, penalties, and interest.
The IRS will automatically record a lien when the amount of unpaid taxes reaches $10,000. It files a Notice of Federal Tax Lien to alert creditors that the IRS is claiming a legal right to your property. 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.
The FTB records liens after a payment demand has gone unanswered. Typically, you are sent a notice of collection action 30 days before recording a lien. The notice contains the amount of tax debt, your rights in contesting the debt, and a deadline for avoiding collection action.
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 won’t 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.
If and when a lien is released because you paid the debt, you will still need to notify all three credit agencies yourself; the FTB will not notify them for you. Once the lien is gone from your credit record, the effects may still last on your credit score, but you now have a chance to restore your credit. You must send a request for the lien notice to be removed; the credit agencies will verify it before removing the lien from your record.
The best way to prevent a lien is to file and pay your taxes in full and on time. If that is not possible, you must at least file your income taxes and pay as much as you can toward the tax liability.
The earlier you notify and begin working with the FTB, the better off you will be. In the event that you may not ever be able to pay the entire tax debt, you can provide an Offer in Compromise. It is an agreement with the taxing agency that you will pay a lower amount, and the tax burden will be considered satisfied.
Another option is requesting an installment payment plan so you can pay an amount toward your taxes on a monthly basis.
As mentioned at the beginning, taxes are complicated. The complications increase when you are unable to pay or if you break any tax law, even inadvertently.
A tax lawyer has the experience and familiarity with both federal and state tax law. You can be assured that all documentation will be filed correctly and on time. A tax attorney has your back when it comes to dealing with the IRS and the California Franchise Tax Board, both intimidating agencies to the common taxpayer.
If you do not pay your income taxes, the IRS and the FTB can and will record a lien against your property and your bank accounts until you have satisfied the debt. A lien has a significant negative impact on your credit, increasing the interest requirements or keeping you from getting a line of credit or a loan in the first place.
That impact can remain on your credit report indefinitely and is not automatically removed upon release of the lien. Obtaining assistance from an experienced tax attorney can help you avoid a lien and the effect on your credit.
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Last updated: May 27, 2023
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