Tax liens are a powerful tool used by the Internal Revenue Service and, in some circumstances, state tax collection authorities. There are several types of “tax liens”, some of which are federal, some are state, and some are local processes used to collect state or local taxes. States may have income, excise, or sales and use taxes which, if unpaid, can result in tax liens. The most feared and infamous type of tax lien is the federal tax lien.
Federal tax liens are an interesting and powerful tool used by the federal government to collect unpaid tax. A federal tax lien arises automatically when a tax becomes due, a demand is made for payment by the government, and the demand remains unpaid.
26 U.S.C. § 6321 states that “If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.
While the government does not have to do anything in order to generate a federal tax lien, and it arises automatically when the tax remains unpaid, it is only effective against the taxpayer until the federal government lets other people know about the lien. The IRS gives notice to the public of a tax lien by filing a “Notice of Federal Tax Lien”. The Notice of Federal Tax Lien is recorded in the county or state office where a delinquent taxpayer’s property is located. In Oregon, this is in the County Recorder’s Office when the subject of a tax lien is real estate. In some states, it is the County Clerk’s Office or the Secretary of State’s Office. In order to let the public know a federal tax lien is attached to personal property, it must also be recorded with the Oregon Secretary of State in the Uniform Commercial Code records.
While the recording of a Notice of Federal Tax Lien can affect a taxpayer’s credit reputation, in 2017 the three major credit reporting agencies (Experian, Equifax, and TransUnion), promised they would stop including tax liens on credit reports unless they could verify the accuracy of the lien information. This happened because tax lien information can be inaccurate and may be difficult to verify. In September 2018, credit reporting agencies again started reporting tax liens on credit reports, but they have to be more accurate in the way they are reported. That requires a credit reporting agency to verify a taxpayer’s identity and make sure that the lien information matches the taxpayer’s records. Due to the added complexities, tax liens are not reported on credit reports as often as they were for many years in the past. Based on Federal Trade Commission rulings under the Fair Credit Reporting Act, consumers have a right to contest tax lien information if it is inaccurate when it is included on their credit report.