IRS Tax Problems – What is a Federal Tax Lien?
A “Federal Tax Lien” is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The Lien protects the government’s interest in all your property, including real estate, personal property and financial assets. A Federal Tax Lien exists after the IRS:
- Puts your balance due on the books (“Assesses” your tax liability); and
- Sends you a bill that explains how much you owe (“Notice and Demand for Payment”); and
- Neglect or refuse to fully pay the debt in time.
The IRS files a public document, the “Notice of Federal Tax Lien”, to alert creditors that the government has a legal right to your property.
How to Get Rid of a Lien
Paying your tax debt in full is the best way to get rid of a Federal Tax Lien. The IRS releases your Lien within Thirty (30) days after you have paid your tax debt.
When conditions are in the best interest of both the government and the taxpayer, other options for reducing the impact of a Lien exist, such as:
Discharge of property
A “Discharge” removes the Lien from specific property. There are several Internal Revenue Code (IRC) provisions that determine eligibility.
“Subordination” does not remove the Lien, but allows other creditors to move ahead of the IRS, which may make it easier for you to get a loan or mortgage.
A “Withdrawal” removes the public Notice of Federal Tax Lien and assures that the IRS is not competing with other creditors for your property; however, you are still liable for the amount due.
Two (2) additional “Withdrawal Options” resulted from the IRS Commissioner’s 2011 “Fresh Start Initiative”.
(1) One Option may allow Withdrawal of your Notice of Federal Tax Lien after the Lien’s release. General eligibility includes:
Your tax liability has been satisfied and your Lien has been released; and also:
- You are in compliance for the past Three (3) years in filing – all individual returns, business returns, and information returns; and
- You are current on your estimated tax payments and federal tax deposits, as applicable.
(2) The other Option may allow Withdrawal of your Notice of Federal Tax Lien if you have entered in or converted your regular “Installment Payment Agreement” to a “Direct Debit Installment Agreement”. General eligibility includes:
- You are a qualifying taxpayer (i.e. individuals, businesses with income tax liability only, and out of business entities with any type of tax debt);
- You owe $25,000 or less (If you owe more than $25,000, you may pay down the balance to $25,000 prior to requesting withdrawal of the Notice of Federal Tax Lien);
- Your Direct Debit Installment Agreement must full pay the amount you owe within Sixty (60) months or before the Collection Statute expires, whichever is earlier;
- You are in full compliance with other filing and payment requirements;
- You have made Three (3) consecutive “Direct Debit” payments; and
- You can’t have defaulted on your current, or any previous, Direct Debit Installment Agreement.
How a Lien Affects You
- Assets — A Lien attaches to all of your assets (such as property, securities, vehicles) and to future assets acquired during the duration of the Lien.
- Credit — Once the IRS files a Notice of Federal Tax Lien, it may limit your ability to get credit.
- Business — The Lien attaches to all business property and to all rights to business property, including accounts receivable.
- Bankruptcy — If you file for bankruptcy, your tax debt, Lien, and Notice of Federal Tax Lien may continue after the bankruptcy.
Avoid a Lien
You can avoid a Federal Tax Lien by simply filing and paying all your taxes in full and on time. If you can’t file or pay on time, don’t ignore the letters or correspondence you get from the IRS. If you can’t pay the full amount you owe, payment options, such as “Installment Payment Agreements” or an “Offer in Compromise” are available to help you settle your tax debt.
Lien vs. Levy
A Lien is not a Levy. A Lien secures the government’s interest in your property when you don’t pay your tax debt. A Levy actually takes the property to pay the tax debt.