How federal and state tax liens differ, and what should you do about them?
Tax liens are powerful legal tools that create a claim against your property to secure unpaid taxes. Although they look similar on the surface, federal and state tax liens differ in origin, scope, enforcement powers, remedies, and how they affect credit and title searches. This guide explains the differences, the real risks, and practical steps you or a client should take if faced with either type of lien.
How a federal tax lien is created and what it means
A federal tax lien arises under the Internal Revenue Code when three events occur: the IRS assesses a tax, sends a notice and demand for payment, and the taxpayer neglects or refuses to pay (IRC §§6321–6323). Once those conditions are met, the lien exists by operation of law and may be publicly perfected by filing a Notice of Federal Tax Lien.
Key implications:
- The lien attaches to all property and rights to property owned by the taxpayer (real estate, bank accounts, business assets) from the assessment date.
- The IRS can both file a Notice of Federal Tax Lien and pursue enforced collection tools such as levies to seize assets.
- After the IRS files a Notice of Federal Tax Lien, taxpayers generally have a limited period to request a Collection Due Process (CDP) hearing — typically 30 days — to dispute the lien or propose alternatives (IRS guidance).
In my practice, the filing of a Notice is often the moment clients recognize the urgency of the problem. Even if a lien is later paid or released, it can complicate title searches, commercial financing, and negotiations with creditors (IRS.gov).
How state tax liens differ from federal tax liens
State tax liens arise under state statutes and vary widely in procedure and remedies. Common forms include liens for state income tax, sales and use taxes, payroll withholding taxes, and, importantly, property tax liens — which are often treated differently and may lead to tax sales.
Differences to note:
- Jurisdiction and rules differ: Each state sets its own timelines, notice rules, appeal rights, and enforcement mechanisms. Some states perfect liens automatically; others require county recording.
- Property tax liens can be especially urgent: Failure to pay property taxes may lead to foreclosure or a tax sale under many state laws — often faster than federal processes.
- Enforcement tools: States can garnish wages, seize bank accounts, place liens on property, and in some cases pursue criminal penalties for willful failure to collect or remit certain taxes (for example, payroll withholding).
Because state rules vary, the practical steps and timelines you must follow depend on the state agency involved. If you’re dealing with a state lien, consult the issuing state’s tax authority website and consider speaking with a local tax attorney.
Priority, perfection, and how liens affect transactions
- Priority: Liens are ranked by priority (often the date of filing or the date the claim attaches). A prior recorded mortgage usually keeps priority over a later-filed tax lien, but the technical details depend on whether the lien relates back to the assessment date.
- Title and sales: Both federal and state liens can show up in public-record title searches and must typically be resolved for clean transfers of real estate. See our guide on how liens affect credit and property sales for more (How Tax Liens Affect Your Credit and Property Sales).
- Credit reporting: Historically, tax liens could appear on credit reports. Since policy changes by major credit bureaus in 2017–2018, many public-record tax liens were removed from consumer credit reports. However, liens still affect lender decisions because they appear in public records and title searches, and some mortgage underwriters will require lien resolution.
Enforcement differences: lien vs levy and state equivalents
- Federal: The IRS can file a lien to establish its claim and can levy (seize) assets like wages, bank accounts, and property after following statutory notice procedures. A Notice of Federal Tax Lien protects the government’s priority against other creditors.
- State: State agencies use similar tools — filing liens, garnishing wages, and levying bank accounts. Property tax liens may be enforced through foreclosure or tax sale, which can move quicker than federal procedures.
A common misunderstanding is to treat a lien as the same as a levy. A lien is a claim; a levy is an actual seizure. Both federal and state authorities can use both when collection efforts escalate.
Remedies: release, withdrawal, subordination, and discharge
- Release/Discharge: A lien is released or discharged when the underlying tax is paid in full or when a government authority issues a certificate stating the lien no longer encumbers specific property. For federal liens, the IRS issues releases once liabilities are satisfied.
- Withdrawal (federal): In limited circumstances, the IRS may withdraw a Notice of Federal Tax Lien to help a taxpayer obtain credit when withdrawal won’t prejudice the government’s collection rights. A withdrawal removes the public Notice but does not remove the underlying tax liability (IRS guidance).
- Subordination: The IRS can subordinate its lien to allow other creditors to have priority for a specific transaction (common in real estate loans). This doesn’t remove the tax lien; it changes priority for that transaction.
For practical steps on how to get a lien withdrawn or discharged, see our article on recording and withdrawing tax liens (How Tax Liens Are Recorded and How to Get Them Withdrawn).
Practical steps to handle a tax lien (federal or state)
- Read every notice and act quickly: Notices list the agency, amount due, and appeal rights. Missing appeal windows (for example, CDP hearing requests for federal liens) can forfeit certain rights.
- Verify the debt: Ensure the assessment is correct and you’re the responsible party. Request an accounting if amounts look wrong.
- Contact the agency early: Many states and the IRS offer installment agreements, temporary holds, and penalty relief programs for qualifying taxpayers.
- Consider collection alternatives:
- Installment agreements (federal and many states).
- Offer in Compromise (federal only): a way to settle for less than the full liability if you meet strict criteria — I’ve used this successfully for clients in severe hardship, but it’s not guaranteed (IRS Offer in Compromise program).
- Currently Not Collectible status (federal): temporarily suspends collection if you have no ability to pay.
- Negotiate lien withdrawals, subordination, or discharges: If you need financing or to sell property, ask the agency about withdrawal or subordination options.
- Work with professionals: Tax attorneys and enrolled agents can negotiate with taxing authorities and protect rights in administrative appeals.
Real-world considerations and examples
In practice, federal liens are often broader in scope because they attach to all property rights and are governed by federal statutes. State tax liens — especially property tax liens — can be more acute for homeowners because of local foreclosure processes. One small-business client I represented faced both a federal lien for payroll taxes and a state lien for unpaid sales tax; prioritizing the payroll-tax liability and negotiating a state installment plan prevented a county tax sale and allowed the business to continue operating.
Common misconceptions corrected
- “A lien will always wreck your credit score.” Not necessarily: major consumer credit bureaus removed many public-record tax liens from credit reports in recent years, but liens still damage borrowing ability because they appear on title searches and in public records used by lenders.
- “If the lien is old, it goes away automatically.” Liens generally remain until released, discharged, or extinguished by payment or statutory remedies; some collections actions are limited by statute of limitations, but property-based liens can persist.
- “You can’t negotiate with tax authorities.” You can. Both the IRS and state agencies have negotiation pathways (installment agreements, offers in compromise, penalty abatements), though qualification rules differ.
Where to look for authoritative guidance
- IRS — general lien information, collection procedures, CDP hearing rights, and relief options: https://www.irs.gov. For federal collection tools and taxpayer rights, see IRS collection policy pages (IRS.gov).
- Consumer Financial Protection Bureau — information about how public records, including tax liens, affect consumer credit: https://www.consumerfinance.gov.
- State tax agency websites — for state-specific rules and timelines.
For further reading within FinHelp, these glossary articles provide focused help:
- Options When the IRS Files a Notice of Federal Tax Lien: https://finhelp.io/glossary/options-when-the-irs-files-a-notice-of-federal-tax-lien/
- How Tax Liens Affect Your Credit and Property Sales: https://finhelp.io/glossary/how-tax-liens-affect-your-credit-and-property-sales/
- What are state tax liens?: https://finhelp.io/glossary/what-are-state-tax-liens/
Final checklist if you discover a lien
- Confirm the liening agency and verify the amount owed.
- Preserve appeal deadlines (e.g., CDP requests for federal liens).
- Consider temporary hardship options and professional representation.
- If selling or refinancing property, request withdrawal, subordination, or a discharge to clear the title.
Disclaimer: This article is educational and not individualized legal or tax advice. Tax laws and agency procedures change; consult a qualified tax professional or attorney for advice tailored to your situation.
