Let's face it: no one likes filing and paying taxes, but it's a necessary evil every year. Unfortunately, sometimes it's hard to come up with the funds to pay the taxes you owe because real life got in the way. This may tempt you to avoid contacting and dealing with the IRS completely, hoping the problem might just go away. It won't go away. If you avoid the IRS you are going to have to be prepared to deal with some very strong repercussions that could affect your credit rating, net worth and family's future.
Receiving a Notice of a Federal Tax Lien
If you are simply late paying your taxes, typically you will be charged penalties and late fees, including interest, until the amount is paid in full. If you fail to work out some kind of payment plan with the IRS, or if you receive a Notice and Demand for Payment and fail to pay the tax debt within 10 days, you'll most likely receive a Notice of Federal Tax Lien.
This type of lien means that the federal government now has a legal claim against your property as payment for your debt, and it cannot be released until you pay your debt in full. After the lien is filed, your creditors will be notified, and your credit report will reflect the amount you owe the government. What many taxpayers don't realize is that this federal lien gives the government claim to all property currently owned as well as property acquired in the future as security for your debt. If the lien is placed against a business, accounts receivable may also have a lien placed against them.
Effects to Your Credit Rating
If you let the situation continue until a federal tax lien is actually filed against you, your credit rating will most likely be negatively impacted. This means your future ability to purchase a home, or car, or anything else requiring credit will be greatly hindered for at least several years.
Releasing a Federal Tax Lien: Additional Charges to You
If you have already had a tax lien filed against you, the best thing to do is act immediately to resolve the problem. The federal government will release your tax lien 30 days after you pay the full amount owed or submit a bond that guarantees the payment of the debt. In addition, you will be required to pay any and all fees associated with releasing the lien. Even after paying your debt, the tax lien will remain on your credit report for up to 10 years, negatively affecting your credit score.
Your Debt: A Matter of Public Record
If you don't want the entire town knowing you business, it's best not to avoid the IRS and any collection efforts. As soon as a Notice of Federal Tax Lien is filed, this is considered a matter of public record and may be viewed by anyone. Sometimes, your local paper may even print this notice in a regular issue where everyone can see. These announcements include the type of lien filed and the amount it is for.
Discharging a Tax Lien
When a tax lien is filed against you and your property, it affects any and all transfers or sales made by you until the lien is satisfied. Selling financial investments or closing accounts may result in being required to use the resulting funds to satisfy your debt to the government. If you decide to sell your home or car, you'll have to either satisfy the debt in order to release the lien, or apply for an official discharge. Potential buyers will view this as a negative aspect to doing business with you, as it can cause delays in the process of transferring the property.
Tax Levies
In addition to filing a lien against you, the IRS may also file a levy against your property and subsequently seize it to satisfy your tax debt. The difference between a lien and a levy is that a levy allows the IRS to take your property outright. This could include your home, car, recreational vehicles and boats, jewelry and other valuables, investment and bank accounts, wages and even the cash value of your life insurance. Often, these are sold at public auction to raise funds and cover your IRS debt.
As you can see, avoiding the IRS and failing to pay your taxes does not make the problem go away. It's always best to try to work with them as soon as possible to prevent any liens or levies that will negatively affect your lifestyle and credit rating for many years to come.
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