A tax lien is a claim to your property that remains in place until a tax debt gets paid. It also allows the taxing authority to seize (take) your property if you fail to pay the tax.
A tax lien arises automatically after a particular event occurs. For instance, state law might provide that a lien will arise on a piece of property if the owner doesn’t pay the tax by a particular due date. If the tax remains unpaid after the due date, the lien attaches. Because the legal code (or statutes) expressly provides for a tax lien, it’s called a “statutory” lien.
Local property tax liens usually attach to the parcel of property associated with the tax. When the property sells, the tax gets paid out of the proceeds of the sale, and the remaining amount goes to the seller. If the taxes go unpaid for a significant length of time, the taxing authority can also force a sale.
Federal tax liens are broader and attach to all of the taxpayer’s property. If the IRS properly files a notice in the county land records in the taxpayer’s county of residence, the IRS will get paid from the proceeds of a voluntary sale.
Additionally, the IRS can seize any property covered by the lien after notifying the taxpayer of its intent to do so (called a “levy”). In fact, the IRS can take steps to seize and sell the real estate and everything else (the personal property) on it. The IRS can also garnish paychecks (take money out of your wages) and levy bank accounts (withdraw money from your account).
However, the government can’t truly strip you of everything that you own. You’re allowed to “exempt” (protect) things that you’ll need to work and live, including a percentage of your wages. You’ll find these exemptions in your state law (and they usually mirror the exemptions allowed in bankruptcy).
To learn more about federal tax liens, visit IRS Back Taxes: Taxpayer Options.
Local property tax debts usually get paid first before any other liens. By contrast, federal tax liens might have to wait in line because they get paid in the normal course—meaning the order in which the lienholder filed the notice in the county land records. The earlier the notice, the higher the payment priority and the better chance the lien will get paid (sometimes the money runs out before all liens can be satisfied). Therefore, if a mortgage predates a federal tax lien, and the IRS wants to sell the property to pay off the debt, the IRS will have to pay off the mortgage before it can use any of the sale proceeds to satisfy the tax debt.
(Learn more by reading What Is Lien Priority?)