Federal Tax Lien – Definition

Cite this article as:"Federal Tax Lien – Definition," in The Business Professor, updated September 30, 2019, last accessed October 27, 2020, https://thebusinessprofessor.com/lesson/federal-tax-lien-definition/.


What is a Federal Tax Lien?

Federal tax lien exists only after the assessment and publications of a taxpayer’s debt details by the Internal Revenue Service (IRS). The publication serves as a notice to liens, and he or she must make the payments. Federal tax liens apply to things such as income, estate taxes, gifts, self-employment, or any other type of unpaid taxes. It is the alien’s obligation to ensure that he or she allows the IRS to secure the taxpayer’s property to enable secure payment.

A Little More on What is a Federal Tax Lien

Basically, the lien applies to all the assets of a taxpayer, including property, securities, and vehicles. Included also are assets a taxpayer acquires when his or her lien status is active. In addition, any business property, a businesses’ receivable accounts, and rights to the business property also apply.

A taxpayer may become bankrupt and file for bankruptcy. In such a scenario, the tax debt and the lien will continue even after bankruptcy. In most cases, bankruptcy cancels out a taxpayer’s debt. However, the situation with lien tax is quite unique and, therefore, worth noting.

How Federal Tax Lien is Taxed

An alien refers to a none-U.S citizen, and to be precise, not all aliens are subject to federal taxation. For instance, resident aliens’ taxation is similar to that of the U.S. citizens, whereby their worldwide income is subject to taxation.

Resident aliens, in this case, are foreign nationals who reside in the United States for a specific period of time. Their qualification to become resident aliens gives them a mandatory obligation of reporting their income on the U.S tax return. The federal tax law requires them to fill the following forms:

  • U.S. Individual Income Tax Return; Form 1040A or Form 1040EZ
  • Income Tax Return for Joint Filers with Dependents and Single

We also have non-resident aliens. For this group, taxation applies to the income earned while within the United States. Taxation for non-aliens also applies to other specified types of international income. Tax return form for non-resident aliens which they must fill is called Form 10401NR.

However, depending on the existing tax treaties with other countries, U.S. tax for non-resident aliens may either reduce or be eliminated. Tax reduction or elimination may apply to the following:

  • Different types of services
  • Other income like interest, pensions, royalties, capital gains, and dividends

Generally, consideration for becoming a resident alien also requires you to pass either of the following two tests; substantial presence test or the green card test for the calendar year. Failure to meet either of the tests, you are considered a non-resident alien.

Difference between Federal Tax liens and Tax Levies

Federal tax liens defer from the tax levies. With federal tax lien, it only denotes the rights the federal government has to seize property, and not its actual seizure. IRS will often file a notice with creditors as well as states about the alien’s tax details.

What federal tax lien does is to lower your credit score substantially. So, if you have a tax lien, you must fully pay taxes. Paying taxes in full will enable you to receive financing from either creditors or state.

References for “Federal Tax Lien”







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