Understanding State Tax Liens and Federal Tax Liens

Tax liens are legal claims placed by tax authorities when taxpayers fail to pay their owed taxes. The government uses these liens to secure its interest in your property or other assets until debts are settled. There are two primary types of tax liens in the U.S.: state tax liens and federal tax liens. While both serve similar purposes, there are essential differences in who issues them, how they are filed, and their consequences.

What Is a State Tax Lien?

A state tax lien is filed by a state’s department of revenue or tax agency to secure unpaid taxes such as state income taxes, sales tax, property taxes, or other state-levied taxes. Filing procedures and laws vary by state, but generally, states record liens publicly, which can affect property sales or refinancing.

More on this can be found in our glossary entry: What are state tax liens?.

What Is a Federal Tax Lien?

A federal tax lien is imposed by the IRS when a taxpayer fails to pay federal taxes such as income tax or payroll taxes. The IRS files a Notice of Federal Tax Lien (NFTL) in the public records at the county or local office where the taxpayer’s property is located. This lien puts creditors and others on notice of the government’s legal claim.

Learn the details here: Federal Tax Lien.

How Tax Liens Affect Property and Credit

Neither type of lien means the government immediately seizes your property. Instead, the lien creates a legal claim that must be resolved before you can sell, refinance, or transfer property. It also negatively impacts credit reports, signaling unresolved tax debt.

Key Differences Between State and Federal Tax Liens

Feature State Tax Lien Federal Tax Lien
Issued by State tax authority Internal Revenue Service (IRS)
Types of Taxes Covered State income, sales, property tax Federal income, payroll tax
Filing Location Varies by state (county/state) County/local recording office
Notice to Taxpayer Usually sent pre-lien filing Notice and Demand for Payment
Public Record Yes Yes
Effect on Property Legal claim restricting sale Legal claim restricting sale
Priority and Duration State law dependent Priority over most claims; 10-year duration (unless renewed or resolved)

Real-World Examples

  • Jane owes back federal income taxes; the IRS files a lien on her home, requiring lien resolution before any sale.
  • Mike owes unpaid state sales taxes; his state files a lien on his commercial property, restricting its sale.

Who Can Be Affected?

Both individuals and businesses that owe unpaid taxes can be subject to tax liens. State tax liens apply within that state’s jurisdiction while federal tax liens cover taxpayers nationwide.

How to Handle Tax Liens Effectively

  • Respond Promptly: Address tax notices immediately to avoid liens.
  • Negotiate Payment Plans: Both IRS and states offer installment agreements or offers in compromise.
  • Verify Accuracy: Review lien filings to identify possible errors.
  • Seek Professional Assistance: Tax attorneys and enrolled agents can negotiate lien removals or appeals.

For additional guidance, see How a Tax Lien Affects You.

Common Misconceptions

  • Liens do not automatically mean property seizure, but ignoring them can lead to enforced collection.
  • State and federal liens are distinct; states actively enforce their own liens.
  • Liens remain until debts are paid or formally released.

Frequently Asked Questions

Can I sell my property if there’s a tax lien?
Yes, but liens must be resolved or negotiated before sale because they transfer with the property.

How long do liens stay on my record?
Federal tax liens generally last 10 years unless resolved. State lien durations vary by state law.

Can a lien be removed without full payment?
Partial payments or lien withdrawals may be possible under certain circumstances.

How do I check for tax liens?
Check public county records or obtain a credit report to identify liens.

References

Understanding how state and federal tax liens differ empowers you to manage tax debt more effectively and protect your financial interests.