Tax Lien: What is it and how do I stop one?
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The Internal Revenue Service (IRS) can file federal liens against taxpayers who owe back taxes. The IRS' ability to freeze a taxpayer’s property is one of the most powerful weapons it uses to force people to pay their delinquent income taxes. Here’s how federal tax liens can affect you, along with some pointers for how to get rid of them.
Written by Attorney Tori Bramble.
Updated August 23, 2021
The Internal Revenue Service (IRS) can file federal liens against taxpayers who owe back taxes. If you file a tax return and pay less than the full amount due, or if the IRS assesses additional taxes against you, a federal tax lien automatically takes effect. A tax lien is a public record notifying the general public that someone has an unpaid federal tax debt. The IRS can place the lien against everything you own, but the primary focus will be on any real property you have, like your home or land.
The IRS' ability to freeze a taxpayer’s property is one of the most powerful weapons it uses to force people to pay their delinquent income taxes. Here’s how federal tax liens can affect you, along with some pointers for how to get rid of them.
What Is A Federal Tax Lien?
A federal tax lien is a claim to your property that prevents you from selling it without the IRS getting paid first. The IRS records a public document called a Notice of Federal Tax Lien in your county's records office. This lien usually goes on record with local governments in the county or city where the taxpayer lives or does business.
With a recorded tax lien, a mortgage lender will be the first lienholder and will get priority to be paid before any other creditor. The IRS is the second lienholder and must be paid before you’ll get paid equity out of your property.
The IRS has to inform you that they’ve placed a lien against your property. To do so, they’ll send you a notice. The IRS must also tell you about your Collection Due Process (CDP) rights within five business days of recording a lien. We’ll talk more about your CDP rights later on.
Also, the IRS isn't restrained by state exemptions like other creditors. State exemptions protect some or all property you own if there’s a judgment against you or if you file for bankruptcy. An IRS tax lien is unavoidable, and it takes priority over any exemptions you might have rights to. This includes state exemptions to protect your property from the reach of creditors.
The IRS will try many times to get you to make tax payments before they make a legal claim against you and begin the tax levy process. If the IRS files a lien against you, it was probably their last resort. They’d much rather you pay your taxes or get you on a payment plan.
Finally, if you’re seeking new credit, the IRS lien lets potential creditors know of its claim for unpaid taxes. This will appear on your credit reports and hurt your credit score. It could prevent you from getting new credit like a mortgage or car loan because lenders will know the IRS has an interest in any real estate and personal property you own.
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How Do I Get Rid of A Tax Lien?
If you receive notice of a federal tax lien, don’t panic. You have several options to deal with this information.
First, you can file for a Collection Due Process (CDP) appeal. As mentioned earlier, the IRS has five business days after recording a tax lien to get the CDP rights notice to you. After getting notice, you’ll have 30 calendar days to request a hearing at the IRS appeals office. A CDP gives you a chance to put IRS collections on hold. You’ll get to talk directly with an IRS settlement officer at the CDP hearing to ask for a solution to your tax problems.
The CDP appeals process can be very scary and confusing for many taxpayers. You should think about if you want help from a tax professional like an enrolled agent, CPA, or tax attorney. You must also request your hearing on time by the deadline the IRS provides in the tax lien notice.
If you don't agree with the CDP hearing decision, you can appeal either to the United States Tax Court or Federal District Court. But make sure you request the appeal to federal court on time. If you don’t, you won’t be able to speak to a judge regarding why you don’t agree with the IRS’ decision.
A second option is to pay off the tax debt. This choice isn't available to most people, or they wouldn't have gotten behind on their taxes in the first place. But if you can do it, it’s the fastest way to get the lien removed from your real estate. Once a tax debt is paid in full, the IRS will file a Certificate of Discharge within 30 days. This document informs the court of their intent to release the tax lien from your property.
Even after the tax lien is released, your credit reports will still show that you had it. It will remain on your credit for up to seven years.
A third option is a discharge. While a discharge won’t get rid of the lien entirely, it will remove it from a specific property. If there is a federal tax lien on your home, you must take care of the lien before you can sell or refinance your property. But first, you have to be eligible to get a discharge.
Usually, if you have equity in your home or land, the tax lien is paid in part or in full out of the proceeds at closing. The amount you can pay against the tax lien is paid depends on the equity you have in your home. If the property is being sold for less than the IRS lien amount, you can ask the IRS to discharge the lien to allow you to complete the sale.
When A Discharge May Be Allowed
To get a discharge, the IRS’ will need to have more than twice the value necessary to secure the amount you owe to them through your other assets. If the numbers work out on the IRS’ end and a discharge is approved, the net proceeds of the sale of your property will go toward paying your tax liabilities
If the IRS interest in the property has no value, like when the mortgages are more than the value of the property, more steps are required to get your discharge approved. If you’re a joint owner on a property that the IRS has a tax lien attached to, the IRS may require you to post a bond (money) in an amount equal to the IRS' stake in the property.
If you qualify, you’ll be required to file IRS Form 14135, An Application for Certificate of Property From Federal Tax Lien, to get a discharge.
Subordination Of A Federal Tax Lien
In some situations, a federal tax lien can be placed under or junior to another lien, such as a bank’s lien. This is known as subordination. The IRS can issue a certificate of subordination to a federal tax lien to let an otherwise junior creditor move in front of the government’s position for the property listed in the certificate. In this case, the IRS still has its lien on the property. But, it becomes a junior lien for the new lender instead of staying in its senior lien position.
The IRS may agree to subordinate its position to let you refinance your home and get a bigger mortgage, if it could be used to pay off at least part of your tax debt. You must file IRS Form 14134 to get a lien subordinated. It’s also important for you to know that the lien will only be released if it's paid in full. And it will still show on your credit report.
Withdrawal Of A Tax Lien
The IRS will withdraw or remove a federal lien if it finds that it made a mistake and it shouldn’t have been filed—such as when it’s filed against the wrong taxpayer. In that scenario, it's like the lien was never filed at all. If you believe a tax lien was filed against you in error, then you should contact the IRS immediately. The IRS will look over your account history to verify that you don't owe the back taxes. Then they will file paperwork to withdraw the lien.
In the majority of cases, it's better to have a withdrawal of your tax lien than a lien release on your record. This is because a tax lien withdrawal happens before the lien is placed on the account. When the IRS withdraws the lien, credit bureaus completely remove all references to the lien on your credit report. But this doesn’t occur with a lien release.
If you’ve recently paid your tax debts, but a tax lien is still on your property, your next step is to file Form 12277. This form is to get a withdrawal of the tax lien. Having this request in your IRS file may help you improve your credit score. It can also clear of the negative stain on your IRS file.
Reasons The IRS Will Withdraw A Tax Lien
When the IRS withdraws a Notice of Intent to File a Tax Lien (NFTL), the agency takes proactive steps to remove the lien before it places it on your account. Typically, this happens when taxpayers take the initiative to repay their tax bill as soon as they receive the notice in the mail. Once full repayment has occurred, the IRS is required to withdraw the intent to file a lien within 30 days.
Certain requirements have to be met before the IRS will withdraw its tax lien. Situations where the IRS will withdraw a tax lien are:
The lien was filed against a taxpayer prematurely or was not placed following IRS procedures
Withdrawal of the tax lien will help the IRS collect income taxes owed
The Taxpayer Advocate believes it's in the best interest of the IRS and the taxpayer that the lien be withdrawn
The Taxpayer Advocate Service (TAS) is an organization within the IRS that acts on its own and isn’t controlled by the IRS. It is there to help taxpayers when they can’t or don’t want to deal with the IRS on their own. A taxpayer advocate is there to inform taxpayers of their rights and make sure they understand the tax collection process. The Taxpayer Advocate is also there to make sure the IRS treats you fairly.
2011 Fresh Start Initiative
If you owe back taxes but have no federal tax liens filed against you, then the IRS Fresh Start Initiative may be an option for you. This program was created to give people with first-time tax debt a second chance to pay off their delinquent tax accounts.
If you are an individual taxpayer willing to pay your tax debt over time through an installment agreement and you can make direct payments to the IRS, you may be eligible for the IRS Fresh Start Initiative. There are two Fresh Start options to choose from:
Option 1 is available for taxpayers if all of these terms apply:
The tax debt has been paid and your lien has been released.
You've paid all your tax returns for the past three years.
You're current on all required estimated payments and/or federal tax deposits.
Option 2 is available for taxpayers who meet these requirements:
You're an individual, ongoing business with income tax debt only, or you previously owned a business for which you still owe taxes.
You owe $25,000 or less.
You're in a direct debit installment agreement that will fully pay your tax liability within 60 months or by the collection statute expiration date (CSED), whichever comes first.
You're in full compliance with other filing and payment requirements.
You've made three consecutive direct debit payments.
You've never defaulted on any direct debit installment agreement.
Other Ways To Get Rid of a Tax Lien
You may also have other options to remove a tax lien. If you’re not able to pay off your outstanding tax debt to get the lien removed, you could consider applying for an Offer in Compromise (OIC) or filing for bankruptcy.
Offer In Compromise
If accepted, an OIC can help you settle your tax debt and eliminate the tax lien. An OIC agreement is a settlement between you and the IRS that resolves your tax liability by allowing you to pay a reduced settlement amount. Offers in Compromise can be difficult to get approved because they have strict requirements. But you may find it worthwhile to apply for one if you’re eligible.
Here’s what you need to know about OICs:
An OIC can take 1-3 years to pay off if the IRS accepts your offer.
You can offer to pay off the OIC over 24 months with a short-term payment plan, but your tax debt must be paid within that period. The two years to pay in full begins on the day you submit IRS Form 656, which you’ll fill out to apply for an OIC.
The two-year period to pay off your OIC tax debt starts on the date you filed Form 656 with the IRS, unless you’re a low-income filer. Qualifying low-income filers don't have to start paying on the OIC until their offer is accepted by the IRS.
Lump Sum Payment
You can ask to pay your delinquent tax debt to the IRS in a lump sum. To qualify for this, when you file Form 656, you’ll be required to immediately pay down 20% of the total amount of your back taxes. You must keep making payments for at least five months after your offer is accepted. Another route you could take is paying 100% down on your back taxes. This way, the IRS tax lien can be removed. This takes place when your offer is accepted within 12-months of filing your OIC.
In any case, the IRS will release the tax lien once your offer is accepted and paid in full. Making the full payment will give you the chance to get a tax lien withdrawal faster. Regardless, you should apply for a withdrawal after the lien is released. That way, you can get it off your credit report.
Bankruptcy is another option to consider, but it only works to get rid of tax liens under certain circumstances, and only with Chapter 13 bankruptcy cases. Chapter 13 is a way to pay off your tax and other debts by making monthly payments in a 3-5 year payment plan. You will propose a payment plan for your debts, and if it’s approved by the Bankruptcy Court, the debts you list in your Chapter 13 case will be paid to your creditors, including the IRS.
You can get a discharge in Chapter 13 in less than 36 months. Or, you can get it in three years if you pay 100% of your debts (including unsecured debts, which are debts not backed by collateral like a house or car). But paying 100% into a Chapter 13 plan would defeat the purpose of getting rid of a tax lien for less than the full amount owed. With this in mind, Chapter 13 may not be a workable option for you.
For an IRS tax lien to be released in Chapter 13, all the following requirements must be met:
The underlying tax debt must be dischargeable under the 3/2/240 rule. This rule applies for consumers with income tax debt who meet certain conditions.
You must pay the value of the equity in your property to get the tax lien released. This means all of the equity in your property. “Non-exempt" equity provided by state law exemptions used in bankruptcy does not protect the equity in your property when there’s a tax lien in place.
In this article, we’ve discussed the many options available to taxpayers who are facing tax liens. You’ve learned what a federal tax lien is, how to appeal one, and other ways of dealing with one, including discharge and withdrawals. We also talked about the Fresh Start initiative and how the withdrawal of a tax lien works. If you don’t qualify for a discharge or withdrawal, you still have options to get rid of a tax lien. Examples include an offer in compromise and filing for bankruptcy. You should carefully consider the best options for your individual situation.