Buying and owning your home can be a dream. It can be used to raise a family, or can be used to rent out the rooms and live of the rental payments. But a big enough tax debt can lead to your home being targeted by the IRS through an IRS tax lien.

How a Tax Lien Impacts Your Finances

The IRS uses tax liens as one of many tools to get back tax debt paid. They’re used selectively, but are a powerful tool used to get taxpayers current with their tax bills.

While a lien may seem complicated and scary, they’re quite simple. It’s essentially a security interest in your property. If your home has some equity to it, liens prevent you from enjoying it.

But how does a lien affect you? Some homeowners who let the back tax debt linger think it won’t have an impact. But the truth is that a federal tax lien dings your financial future.

An IRS tax lien can even affect more than just a home; it can attach to vehicles, securities, and business assets. If it attaches to your business then your rights to your business property will be compromised, including any accounts receivable.

Liens and Credit

But the biggest effect of an IRS tax lien is on your credit.

A lien is up there with not paying your bills when it comes to credit reports. If the lien isn’t released, it’ll damage your credit report for seven years.

That’s because liens are formal documents filed in court. A Notice of Federal Tax Lien filed in a courthouse is a public document. That means everyone, including credit reporting agencies, will be able to see.

You may have some time after the lien is filed where no one will notice, as liens aren’t reported to the credit reporting agencies (the IRS can’t do that). But after the credit reporting agencies (or inquisitive people) notice the public filing, it inflicts major damage to your credit score and can prevent you from getting credit.

Another effect of a lien on your home is that any sale proceeds are reduced by the lien amount (which is generally the amount of unpaid back tax debt).

Liens Can Be Relieved

The IRS can also show some mercy to tax debtors. It can remove a lien if the home is sold for less than the lien amount. It can also make the lien secondary to a lender’s lien if the back tax debtor wants to refinance or restructure his or her mortgage.

But if you want to keep your credit score top-notch, avoiding a federal tax lien is more important than you think.