Considering that the Internal Revenue Service (IRS) is among the most efficient of all debt collectors, it is no surprise that some creditors wish they could put the resources of the IRS to work for them. A tax lien is one of the most effective tools used by the IRS and state tax agencies to secure delinquent tax debt. However, that tool is not available to everyone, and most creditors will be forced to find other means for recovering their debts. It should be noted that a tax return is not property, and, as such, no lien can be issued against it.
Definition
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A tax lien is a collection method used by the IRS to secure its interest in a taxpayer's property. The lien protects the IRS interest in a person's property against third-party creditors. In laymen's terms, this means that the lien moves the IRS to the top position, ahead of all other creditors. For example, if the IRS places a lien on your home and you sell the home, the IRS gets its money from the sale first, then other creditors split the remaining money.
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Filing
If the lien is on real property – such as a house or boat -- the IRS is required to file the lien in the recorder's office of the county where the property is located. If a lien is filed against other property you own, the lien is filed in the county in which you live. Before a lien is filed, the IRS is required to send taxpayers a demand for payment notice outlining the total amount owed, including penalties and interest. The IRS is only allowed 10 years from the date of your tax assessment to collect on the lien.
Offset
An offset is somewhat like a lien, but offsets allow the IRS to collect on back taxes as well as other delinquent state and federal debt by taking a taxpayer's refund to cover the debt. The Department of Treasury is charged with the responsibility of collecting delinquent debts from taxpayers and forwarding those payments to federal and state agencies. The Treasury Offset Program (TOP) collects delinquent debts such as late student loan repayments, past due child support, state income tax obligations, unemployment compensation owed, federal taxes, and other delinquent state and federal obligations. Once a creditor agency requests a payment and the Taxpayer Identification Number (TIN), Financial Management Services (FMS) sends the payment to the agency in question. Only the IRS can take a person's tax refund to cover a debt. That right is not given to any other person or authority.
Distinctions
While the IRS issues a lien and creditor agencies contact payment agencies to request an offset, there is no mechanism in place that allows an individual to put a tax lien on someone's property or to seize anyone else's tax refund. If an individual owes you money, you must resolve the issue in the court system, because no one except the IRS is allowed to issue a lien.