Tax Lien

What is Tax Lien?

Tax Lien is a lawful claim with respect to the assets of a person or a company that has not paid or failed to pay the taxes which is owed by the government and it serves as an assured payment of any debt like loans, taxes etc and if obligation is not met then creditor can seize all assets.

How Does Tax Lien Works?

In a particular case of inability of any person to pay tax liabilities under any law, it acts as last resort for recovery of as a last resort for recovery of requisite dues.

The business may get hampered in case any tax lien is enforced against it. Following actions might be taken for recovery of dues:

How Does Tax Lien Works

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#1 – Lien on Assets

They may lead to attachment/seizure of defaulter’s assets (current and/or non-current). Not only assets held during the lien period but also future assets, which will generate future economic benefits to the defaulter. For example, any property (Movable or immovable) like a car owned by the defaulter, a debtorDebtorA debtor is a person or entity that owes money to the other party in a transaction. The receiver is referred to as the creditor, and the payment terms vary for each transaction based on the terms and conditions agreed upon by the parties.read more (future economic benefit) of defaulter who may be served notice to pay the amount payable to defaulter directly to the department on behalf of a defaulter.

#2 – Creditworthiness

The creditworthiness of any person on whom this lien is served may be adversely affected, and as a consequence person might not avail creditworthiness due to the fall of the Credit Rating Score. For example, limits of credit under the credit card may be reduced; the interest rate may be increased, etc.

#3 – Displaying in Public Records

This may affect the brand image of the business/ person and may affect the business adversely. 

#4 – Business Operation

Due to such a lien, the organization’s day to day activity may get hampered due to the reason that assets are required to run operations getting attached by the tax department.

#5 – Bankruptcy

Even after an entity has applied for bankruptcy under any act, law, court, tribunal, tax lien over its assets may continue unless paid.

Steps Involved in Tax Lien

Tax-Lien

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Follow the below steps:

  1. Demand Notice Issue

    Whenever any tax liability becomes overdue, the department issues a written/electronic notice to assessee demanding unpaid taxes, interest, penalty, any fees, charges any other amount.

  2. Response to Demand Notice

    Assessee can revert with their comments/observations/objections regarding tax, interest, penalty, and/or any other liability calculated. Also, the assessee can directly pay the same.

  3. Charge for Tax Lien

    In case the assessee does not pay the estimated liabilities within a stipulated time period, the department will charge lien against the defaulting person.

  4. Further Action

    Once Tax lien gets in charge, the department gets the power to seize any asset of the defaulter (current as well as future), attach bank accounts, might also recover tax dues from any pending tax refunds.

Note: Above stated steps are indicative in nature. The actual process may contain some more steps in addition to or in substitution of the above ones.

What shall I do if Government Creates a Tax Lien Charge on My Property?

It is a legal charge which the Government may create on any asset personal or business asset. So as to minimize its adverse effect on the business owner may follow any of the following paths:

#1 – Compromise/Instalment/Delay

In case, the defaulter cannot afford to pay the entire amount of tax dues, he/she may demand waiver against any charge (Penalty, charge, etc.). Department may agree with the same based on defaulters Income etc. The defaulter may not have adequate cash in hand to pay off dues at once. In such a case, he/she may request the department to discharge tax liability in installments. Also, defaulter may ask for a particular period of time to pay dues. Department may/may no consider defaulter’s request.

 #2 – Pay Off Tax Dues

The best way to settle a tax lien is to settle the liability by making payment. Department removes the lien after a period of 30 days of payment.

#3 – Withdrawal

Department may temporarily remove the lien based on assessee’s demand if the department finds the same genuine.

#4 – Subordination

In this case, It is not released, but other creditors can claim priority in settling their dues with the defaulter.

Can Tax Lien Lead to Imprisonment? Is it a Criminal Offence?

The tax lien is simply a legal claim over tax defaulter’s assets for recovering overdue tax or other liabilities. This, on its own, cannot lead to imprisonment, nor is it treated as criminal offense until and unless the department is of the opinion that failure to pay tax dues as a result of deliberate action.

For example, the department may consider it as a criminal offense if failure to pay tax dues was due to fraudulent activities like hindering income returns, claiming false deductions, preparing false financial statements.

Under such cases, the department assumes defaulter’s intention to evade tax dues and accordingly treat it as a criminal offense and decide imprisonment based on governing rules.

Conclusion

A tax lien can be said as a legal claim or right of the Government to recover tax or any other amount due from the defaulting/ non-compliant organization. Applicability of lien ensures the Government of getting paid over other creditors. They can be regarded as department last resort to recover the unpaid overdue amount of tax, interest, penalty, or any other liability. They can be charged against any property – business or personal. It adversely affects day to day business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation.read more. The person should try to avoid the same so as to ensure its business does not get hampered and operates smoothly.

This has been a Guide to What is Tax Lien & its definition. Here we discuss how tax lien works and the steps involved in such lien and what you should do if the Government creates a lien on your property. You may learn more about accounting from following articles –